September 6, 2011

Brazil No Longer Low Cost Sugar Producer

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

Brazil used to be the lowest cost sugar producer in the world responsible for nearly 50% of the world's sugar production, but they have lost that low cost ranking due to rapidly increasing internal costs. Brazil has abundant land available for sugarcane production, a favorable climate, and hundreds of years of experience in growing sugarcane, but competing countries such as Australia, South Africa, and Thailand are now producing sugar at a lower cost than Brazil.

Brazilian sugarcane, sugar, and ethanol production has been increasing steadily over the decades until three years ago when a series of events, both natural and self-inflicted, turned the tide and sugarcane production has been declining now for three years.

According to Unica (the Union of Sugarcane Industries), since 2005 the cost of producing sugarcane increased 40% from R$ 42 per ton in 2005 to the present cost of R$ 60 per ton. A series of events led to this increase including: inclement weather, lack of investments in renovating the sugarcane, the high cost of credit, a stronger Brazilian currency, and a government mandate to switch to mechanical harvesting.

By the year 2014, nearly 100% of Brazil's sugarcane will be mechanically harvested. While mechanical harvesting will eventually be cheaper than hand harvesting, the government mandate caught the industry by surprise resulting in numerous problems. The hand harvesting required a lot of unskilled labor using a machete. When producers were forced to switch, there was a lack of mechanical harvesters and the harvesters that were available were very expensive. The producers also did not have the skilled labor needed to operate and maintain the machinery and they had to invest in training programs and higher salaries for the operators.

There are also agronomic problems associated with the switch from hand harvesting to mechanical harvesting. Before a field of sugarcane was harvested by hand, the field was burned to eliminate the dry leaves. It was this burning and the associated air pollution and adverse health effects that prompted the federal government to ban the practice. With burning no longer allowed, sugarcane producers have yet to devise a way of adequately disposing of the additional residue. If too much of the residue is brought along with the sugarcane, it increases transportation and processing costs. If too much residue is left in the field, it increases disease and pest pressures for the next crop.

Mechanical harvesting also requires a different row spacing compared to hand harvesting and since a field of sugarcane can be harvested for 5-6 years after it is planted, it will take until the field is replanted in order to have the correct row spacing.