May 23, 2014
Dry Summer Weather Impacting Brazilian Sugar Production
As the sugarcane harvest progresses in southern Brazil, the impact of the driest summer weather in decades is becoming more evident. Southern Brazil produces 90% of Brazil’s sugarcane and a severe drought from December to March resulted in some sugarcane plants that are only half their normal height of more than three meters. In the hardest hit areas, sugarcane production may be down as much as 20%. During the 2013/14 harvest season, southern Brazil produced 595 million tons of sugarcane, but there are now estimates that the 2014/15 harvest may be down 5% or more to 565 million tons. The sugarcane harvest started in April and it will conclude in December.
Sugar prices have strengthened in recent months in anticipation of lower sugar production in Brazil. The price of sugar has risen 14% since January to approximately 17.75 cents a pound and some analysts feel it might hit 20 cents a pound by the end of the year. Copersucar in Sao Paulo anticipates that the demand for sugar may outpace the production by nearly one million tons during the current year ending on September 30th and that the deficit may increase to as much as three million tons during the year starting on October 1st.
Brazil is the largest sugar producer in the world responsible for 28% of the world’s production and 57% of the world’s sugar exports, so a reduction in Brazil’s sugar production has worldwide repercussions. World sugar production may now fall short of world demand for the first time in four years.
In addition to poor weather reducing the sugarcane crop, Brazilian sugar mills are devoting a higher percentage of their sugarcane to the production of ethanol instead of sugar. As much as 58% of Brazil’s sugarcane will be used to make ethanol in 2014/15, which would be the highest percentage in five years.
The highest sugar price in 30 years occurred in February of 2011 and from then until January of 2014, prices had declined 59%. Since 2010, at least 44 sugar mills in Brazil have closed their doors due to low sugar prices and the efforts of the Brazilian government to try to control inflation by artificially holding down the price of gasoline. Ethanol prices in Brazil are directly tied to the price of gasoline, so if the gasoline price is held down, so too is the price of ethanol.
Ethanol producers have asked the federal government to allow gasoline prices to rise, but there is little chance of that happening until after the presidential elections in October.
In addition to sugarcane, the summer drought in southern Brazil also had a big impact on coffee and orange juice production as well. As a result, coffee futures have risen 66% this year and orange juice has risen 12%.