The forthcoming CS Brazil harvest is set to reach a new record with an expected 590 million tonnes of cane set to be crushed, according to Czarnikow, one of the UK’s oldest sugar traders.
The record crush is expected to raise production to 33.5 million tonnes, an increase of 17 per cent on last year, when the crop was hit by poor weather conditions. However, a collapse in expected earnings driven by the sharp recent falls in the price of sugar and ethanol is set to have far reaching consequences, as the sector had been hoping for better returns to pay for the renovation of older cane supply and the upgrade of crushing capacity.
Throughout the past season returns for sugar were above ethanol creating a shift by the sector towards sugar production ahead of ethanol production.
The recent fall in the sugar prices of almost 60 % since February has opened up the potential for significant growth in the ethanol market.
Domestic ethanol demand is likely to increase substantially as the flex-fuel car fleet grows from its current market share of around 40%, with around 90% of all new cars now employing this technology. We expect domestic ethanol demand to grow by at least 3.5 bn litres or around 15 per cent this year.
The increase in production from the record crop is not expected to lead to an equivalent increase in export capacity – we estimate that the increase will not exceed 2 million tonnes.
Although we expect an increase in productivity, and UNICA is expected to confirm this, the outlook for earnings is the reverse. Sugar and ethanol prices are no longer remunerative for the sector and 2010/11 is going to be extremely difficult.
Following the credit crunch of 2008, and mill defaults, the sector has found it more difficult to access capital, especially from the international market and some mills are going to struggle to service debts, which will see an increase this season in the number of groups under Recuperação Judicial, the Brazilian equivalent of US Chapter 11 protection.
Without an improvement in sugar prices, the rise in production during the 10/11 season could be reversed in 11/12 as the sector struggles to find capital to replace aging cane.
“The start of crushing in CS Brazil is always a pivotal time in the sugar market, and especially so this year following the shortfall in supply during the previous season," says Toby Cohen, head of analysis at Czarniko. "Although we are heading for a record 590 million tonnes, the poorer earnings will have far reaching consequences as the market is now back to levels that do not support growth.”
