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Booming sugar exports and quick harvest could spell trouble for ethanol

. Sep 22, 2020
sugar exports brazil Sugar shipment being loaded in the Paranaguá Port. Photo: Ivan Bueno/APPA

Booming international prices and a weakening currency led Brazilian mills to increase sugar production by 32 percent in the 2020-2021 harvest, making the country the world’s biggest producer for the second year in a row. Now, as more and more cane becomes sugar, and the dry weather speeds up the harvest, the country risks reducing the safety margin for ethanol production in 2021, according to experts. 

Data from sugar mills association Unica shows that sugarcane crushing reached 415.1 million tonnes by the end of August — 3.8 percent more than the same period in 2019-2020, despite a slowdown in the second half of the month caused by rains in São Paulo state.

</p> <p>According to Bruno Lima, sugar and ethanol analyst at consultancy StoneX, the increasing appetite for Brazilian sugar exports and the dry weather are encouraging producers to move forward with a final push before the end of the harvest in October. As a result, there will be less surplus sugarcane — <em>cana bis</em>, as it is known in Brazil — in the fields to support an early start of the 2021-2022 crushing season in March.&nbsp;</p> <p>“When crushing speeds are high, you have less leftover sugarcane for the next harvest. Our estimates are that ethanol stocks will reach 1.5 billion liters by late March, compared to 1.9 billion liters in the previous season. We may have a price peak at this time,” Mr. Lima tells <strong>The Brazilian Report</strong>.&nbsp;</p> <p>The National Supply Company (Conab) expects Brazil’s ethanol production to drop by 14.3 percent, to 30.6 billion liters over the course of the harvest.&nbsp;</p> <p>Any price hikes, however, depend on the recovery in fuel consumption after the end of social isolation measures and will be capped by gasoline prices, he adds. As ethanol is less energy-efficient than gasoline, local drivers will not buy it unless the price is 70 percent lower than gasoline.&nbsp;</p> <p>With sugar beet crops suffering from jaundice in Europe, Thailand’s production halved, and Índia’s harvest hindered by Covid-19, benchmark sugar prices remain high, which suggests the production mix will remain slanted toward sweetener for the time being.&nbsp;</p> <p>Recent measures by the Brazilian federal government have also made sweetener more advantageous for local producers. On Monday, President Jair Bolsonaro announced the U.S. government had <a href="https://www.novacana.com/n/acucar/exportacao/brasil-recebe-cota-adicional-vender-80-mil-toneladas-acucar-eua-bolsonaro-210920">increased sugar import quotas</a> from Brazil by 80,000 tons, reaching a total of 310,000 tons. The deal, however, came two weeks after Brazil extended <a href="https://g1.globo.com/politica/noticia/2020/09/11/brasil-renova-tarifa-zero-para-cota-de-importacao-de-etanol-dos-eua-por-tres-meses.ghtml">tax exemptions for U.S. bioethanol</a> until December, which may push prices down for a while.&nbsp;&nbsp;</p> <p>For Eduardo Leão de Sousa, Unica’s executive director, a potential increase in ethanol production is owed to &#8220;a scenario of demand for sugar and bioethanol.” In an emailed statement, he added that the mix may be quickly altered if there is a need to do so, and stressed that producers are committed to the targets established in the National Biofuels Policy.&nbsp;</p> <p>Monitoring by StoneX, however, stoked concern about how much leeway there is to shift production, 57 percent of sugar exports for next year are already sold or pre-priced.&nbsp;</p> <h2>First rice, now sugar? Not quite</h2> <p>Despite a 120-percent increase in sugar exports in August, to a monthly record of 3 million tons, Brazilian experts refute any expectation of a shortage in the domestic market, as has now been the case with <a href="https://brazilian.report/newsletters/brazil-daily/2020/09/10/brazil-economic-recovery-flounders-as-food-prices-soar/">rice</a>.</p> <p>According to Mr. Leão de Sousa, domestic consumption hovers around 10 million tons a year, however, “in five months of harvest, we produced over 25 million tons of sugar and crushing is still ongoing — not to mention the harvest in the Northeast, which starts right now”, he notes.&nbsp;</p> <p>From January to August, exports surpassed 15 million tons — 57 percent more than the same period of 2019. Meanwhile, Conab predicts Brazil’s sugar production to hit a record of 39.3 million tonnes in the 2020-2021 harvest — 35.6 million coming from Brazil’s Center-West, Southeast, and South regions, known collectively as the &#8216;Center-South.&#8217;&nbsp;</p> <p>Per StoneX calculations, exports from April to August were enough to keep stocks at a reasonable level. However, “from October to March, the Center-South area has to export more than we have ever done in history” to avoid high stocks from pressuring prices, says Mr. Lima.&nbsp;</p> <p>The extra push, he says, happens precisely when the harvest is beginning in the northern hemisphere. “Traditionally, the export seasonality is lower in this period. Will there be so much demand from now on?”, he asks.</p> <p>International <a href="https://www.udop.com.br/noticia/2020/09/21/mercado-futuro-do-acucar-em-ny-sobe-7-na-semana-estiagem-e-incendios-preocupam.html">benchmark prices</a> suggest so. In New York, <a href="https://www.udop.com.br/noticia/2020/09/21/mercado-futuro-do-acucar-em-ny-sobe-7-na-semana-estiagem-e-incendios-preocupam.html">prices rose 7 percent </a>in the week from September 11 to September 18, off the back of concerns with dry weather in principal producing areas and forest fires.&nbsp;&nbsp;</p> <h2>Unexpected factors</h2> <p>Abroad, crop failure in Thailand leading to the smallest production in 10 years was already on producers radar since the beginning of the year, say experts. Still, the Brazilian output may be required to fill other unexpected gaps.&nbsp;</p> <p>In the European Union, where France’s sugar beet crops were attacked by jaundice and Germany’s suffered from dry weather, sugar production <a href="https://www.reuters.com/article/us-europe-sugar-crops-idUSKBN2651LD">is set to fall </a>to 16.1 million tons, down from around 17 million in 2019.</p> <p>In India, another major producer, Covid-19 is the issue: the harvest there is largely manual and the uptick in infections may prevent workers from travelling and <a href="https://www.reuters.com/article/health-coronavirus-sugar-india-idUSKBN25T0L9">delay production</a>.&nbsp;</p> <p>India’s situation is being closely monitored and has not entirely been factored into current prices, says Mr. Lima. “There are fears that, if Covid-19 cases increase too much in India, we may have a scenario that is not in the game right now. It will impact not only production, but also logistics. They may not be able to export if they close the ports.”

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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