October 4, 2011

Brazil's Sugarcane Fields Getting Old, 30% Over 12 Years Old

While agricultural production continues to be on the upswing in Brazil, the sugar/ethanol sector has not been able to keep pace. According to the Agriculture and Livestock Confederation of Brazil (CNA), the agriculture sector was responsible for 22.4% of the Gross National Product in Brazil in 2010 and agriculture accounted for 37% of the exports and one third of all new jobs created in 2010. During the first half of 2011, agriculture's percent of the Gross National Product increased by 3.3%.

While the overall outlook is positive for Brazilian agriculture, the same cannot be said for the sugar/ethanol sector. Even though sugarcane acreage increased 5% in 2011/12, sugarcane production is expected to decline 15% to 20% in 2011/12 due to a series of problems

One of the biggest problems in Brazilian sugarcane fields is that the sugarcane is getting old and it should have been replanted years ago. A field of sugarcane is most productive during the first six years after it is planted. If a field is not replanted after six years, it starts to loose approximately 10% of its productivity each year it's not replanted. In a recent study conducted by Conab, it is estimated that as much as 30% of Brazil's sugarcane is 12 years old or more. The age of the sugarcane coupled with adverse weather over the last several years is the principal reasons for the declining sugarcane production.

The current problems in Brazilian sugarcane fields can be traced back to the financial collapse in 2008. The resulting credit squeeze meant that many farmers could not borrow the money needed to replant their fields. As a result, the sugarcane kept getting older and the productivity started to decline. According to Conab latest report, 1.2 million hectares of sugarcane should have been replanted in 2011, but it wasn't. This lack of renovation alone probably resulted in a 6% reduction in nationwide sugarcane yields.

Adverse weather over the last two years has also been a factor. The extended dry season between April and October of 2010 reduced the regrowth of the cane that was harvested and it hindered the establishment of the cane that had been replanted as well. Several episodes of freezing temperatures this year negatively impacted the crop and it also caused the sugarcane to flower, which is a relatively rare event. When a sugarcane plant flowers, it devotes some of its energy to the flowering process instead of producing sucrose, thus the sugar yields decline when the plant flowers.

Add to the mix high international sugar prices which persuaded mill operators to produce more sugar and less ethanol. The margins on sugar production can be up to 20% more than ethanol production. This switch resulted in significant cuts in ethanol supplies and much higher ethanol prices.