March 16, 2012

Ageing Brazilian Sugarcane May Limit Anticipated Production

Sugarcane producers in southern Brazil are hoping for a modest increase in their overall production this harvest season, but it probably won't be enough to get back to where they were two harvest seasons ago. For the last several years the lack of investments in renovating the ageing sugarcane crop and adverse weather has led to disappointing sugarcane production in southern Brazil. In spite of government incentives to increase the level of investment in the sugar/ethanol sector, it appears that the renovation process will again fall short of original expectations.

Estimates for the 2012/13 sugarcane harvest in southern Brazil fall into a range of 475 to 540 million tons, which would generally be 4% to 9% better than last year, but still approximately 3% below the level of the 2010-11 harvest season. The Parana Bioenergy Producers Association (Alcopar) is estimating the southern Brazil production at 515 million tons, or an increase of 4.2% compared to last year. Agroconsult is estimating the production at 540 million tons or an improvement of 9%. F.O. Licht, which has the production in the range of 475 to 515 million tons, may actually lower its original optimistic estimate in soon to be released estimates. Copersucor lowered its earlier forecast of 540 million tons to a range of 500 to 520 million tons. The high-point in recent years was the 2010/11 harvest season when 556 to 560 million tons of sugarcane were produced in southern Brazil.

In addition to adverse weather, the lack of renovation of Brazil's sugarcane crop continues to limit the potential improvement in the crop regardless of how the weather actually materializes. In northern Parana for example, the average age of the sugarcane is estimated at 6 years, which is one year older than ideal. There is a similar situation all throughout the sugarcane production regions of Brazil. A lack of credit and investments in renovating the sugarcane has resulted in an ageing sugarcane crop nearly everywhere in Brazil. As the age of the sugarcane reaches approximately 6 years or older, it starts to lose 10% of its productivity every year it is not renovated.

If a producer is looking to reduce production costs in the short term, the easiest way is to not replant the sugarcane, even though it may be past its prime age. Producers realize that the quickest way to increase their productivity is to replant the fields, but that takes financial resources that they have not had in recent years. To significantly increase the overall sugarcane production in Brazil and not just the productivity of individual fields, a tremendously large amount of investments are needed to increase the sugarcane acreage as well as building the additional sugar/ethanol mills needed to process the additional production.

In order to renovate 6.4 million hectares of Brazil's sugarcane by 2015 (three quarters of the total) the government started a program in February called the Strategic Plan for the Sugar/Ethanol Sector. Tens of billions of reals will be made available in the form of low interest loans specifically geared toward the renovation of existing sugarcane production. While it is a good start, few in the industry feel it is bold enough to even approach the level of investments needed to stimulate the type of expansion needed by the industry to meet the increased domestic demand for ethanol.

The sugarcane harvest in southern Brazil is expected to start in early April, which is approximately two weeks later than normal.