September 20, 2012

30% of Sugar/Ethanol Mills in Brazil in Financial Trouble

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

Sugarcane producers in Brazil continue to have difficulties in expanding their sugarcane production to meet the demand of the industry. According to the president of Coplacana, Amaldo Bortoletto, which is the largest sugarcane cooperative in southern Brazil, the problem stems from the fact that independent producers have not been able to pay down their old debts and the amount of credit available for new sugarcane production has been very limited.

With more than nine thousand associates, the Coplacana cooperative grows the equivalent of four million hectares of sugarcane or nearly half of the 8.2 million hectares of sugarcane grown in Brazil. Their members grow sugarcane in Sao Paulo, Goias, Mato Grosso do Sul and Minas Gerais

While the short term prospects for the industry are not encouraging, the long term view is more optimistic. Due to disappointing sugarcane production over the last three years, ethanol prices have increased making the fuel less competitive compared to gasoline. As a result, owners of flex fuel vehicles in Brazil have been purchasing more gasoline forcing Petrobras to import large quantities of gasoline. Three years in a row of poor sugarcane crops was not anticipated and now Petrobras has been forced to import gasoline due to a lack of refining capacity.

This short term problem is expected to be resolved once sugarcane production resumes its upward trend. Over 90% of new cars in Brazil are flex fuel so the demand for ethanol will continue expanding if the price of the fuel can be kept below 70% of the price of gasoline.

Brazil has over 400 sugar/ethanol mills and approximately 30% of the mills are either on the verge of insolvency, already in receivership, or threatening to close their doors. The problem is underutilization of existing capacity. According to the Union of Sugarcane Industries (Unica), the industry has the capacity to process 700 million tons of sugarcane per year, but is expected to process only 509 million tons in 2012/13. This is only a small improvement over 2011/12, which itself was a very disappointing crop.

The industry had been expected significant increases in sugarcane production, which have not materialized in recent years. Part of the problem is the independent producers who cannot access the type of credit lines available to larger corporations. The government has established a program to increase sugarcane production through loans offered by the National Development Bank, but thus far there has been little to show for their efforts.