September 12, 2011

Brazilian Sugarcane Sector Having the Worst Year in a Decade

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

For the sugar/ethanol sector in Brazil, 2011/12 is turning out to be the worst year in more than a decade. The current low point for the sector has been the result of three years of adverse weather, a steep drop in available credit, a lack of new investments in new sugarcane production, and a surging demand for sugar and ethanol. An estimated R$ 80 billion in new investments will be needed over the next decade to bring the supply/demand back into balance.

In their latest estimate, the Union of Sugarcane Industries in Brazil (Unica) estimates that the 2011/12 sugarcane tonnage will be down 8.4% compared to last year. Unica estimates that sugar production will be down 8% and hydrous ethanol production (sold as E100) will be down 20%. It is so bad that for the first time in history, the yield per hectare of sugarcane grown in southeastern Brazil will be lower than the yield per hectare of sugarcane grown in Northeastern Brazil.

Part of the source of the current problems stems from the way sugarcane is produced. A field of sugarcane is harvested several times over its 5-6 year lifespan and if there is a problem with the production any time during those 5 or 6 years, the yields continue to decline until the field is replanted. Since the financial crisis of 2008, little of the sugarcane in southeastern Brazil has been replanted and as a result, yields have fallen for three straight years. The financial crisis dried up the credit that producers need to replant their fields. Without credit, they tried to extend the lifespan of their sugarcane fields and as the sugarcane got older, the yields declined. In addition to having older fields of sugarcane, a series of adverse weather events over the last three years has compounded the problem.

Between 2003 and 2008 the sector was growing at a rate of 10% per year and 90 new sugar/ethanol mills opened in Brazil during that five-year period. After the financial crisis of 2008, the opening of new mills declined each year and only four new mills are expected to open in 2011. The sector needs to grow at a rate of 7% to 8% per year and they need to build 15 medium size sugar/ethanol mills per year until the year 2020 to meet the increasing domestic demand for ethanol and a 2% annual growth rate of sugar consumption expected worldwide.

The shortage of ethanol in Brazil is already resulting in price increases even though the sugarcane harvest will not conclude for a few more months. The Brazilian government has announced that the percentage of ethanol blended into gasoline will be reduced from 25% to 20% starting October 1st as a way to extend limited supplies of ethanol. The short fall in ethanol production is being compensated for with increased imports of ethanol principally from the United States.

The only bright spot in the sector is the fact that the shortage of sugarcane has resulted in higher prices for producers. A ton of sugarcane which sold for an average of R$ 47.00 last year and now it is selling for R$ 65 to R$ 70 per ton.