Dilemma for Brazil mills as sugar moves to surplus

by Agrimoney.com

Czarnikow has added its voice to those forecasting a return by the sugar market to surplus in 2011-12, potentially pressuring prices – and handing a dilemma to mills in Brazil, the top producer.

The sugar merchant said that world sugar production would, after three successive seasons of deficit, return to exceeding consumption, a forecast which echoes similar assessments from many other analysts.

The forecast came shortly before the International Sugar Organisation estimated the 2011-12 surplus at "more than" 3m tonnes.

Kingsman, the Swiss-based consultancy, on Thursday hiked its forecast for the world sugar surplus in the marketing year, which it runs from April to March, from 5.607m tonnes to 10.575m tonnes, after a deficit last season it pegged at about 100,000 tonnes.

Czarnikow said that the return to surplus would be driven by a "surge" of 10m tonnes in world production – driven this time by other countries as well as Brazil, which accounted for nearly half growth in output last season.

Brazil's output growth will slow to 1.5m tonnes, although this will be enough to ensure that its exports this season are "the largest on record", including 25m tonnes from the important Centre South district.

Total Centre South production is estimated at 35m tonnes, from cane harvest up 3.3% at 575m tonnes.

To cut, or not to cut

However, the potential jump in output presents a dilemma to Brazilian mill, over whether to stick with plans that many had to build up their cane harvest later, when a more mature crop will offer greater sugar yields, or to cut now, while prices remain high.

The yield penalty from early harvest of cane - which, with its average age raised to 4.2 years by low replanting, is considered past maximum potential - was evident in data from industry group Unica on Thursday showing sugar content so far this season down 11.3% to less than 100kg per tonne of cane.

Later-harvested cane tends to provide a higher sugar concentration.

But prices are offering mills "every incentive to capture high early-season returns", with domestic sugars trading at the equivalent of more than $0.30 a pound "and strong spot physical premiums for prompt exports", Czarnikow said.

If global plans to raise sugar output succeed, "the chance of prices staying high seems quite remote".

Financial squeeze

As an extra complication, Brazilian mills face political pressure for production of ethanol, rather than sugar, from cane, following a domestic shortage which has driven many motorists to favour gasoline, and the country to import the biofuel.

Furthermore, many mills are, despite high prices, still recovering from the global financial crisis.

A squeeze on investment is behind a reluctance to replant cane on cane plantings, and a fall to five in the number of mills that Unica expects to open this season.

"With much at stake, it will be interesting to see how the industry evolves and adjusts," Czarnikow said.

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