Monster Crush - SUGAR BRAZIL

Sugaronline Friday Editorial - And...They're...Off!

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Mills across Brazil are getting ready to fire up their boilers in preparation for the start of a monster crush that some estimates put at up to 11% higher than last year, indicating a potential reversal of fortunes after successive crops came in smaller due to under investment and poor weather conditions.

Lack of finance as a result of the global economic crisis mixed with aging ratoons made for a bad combination when paired with collapsing infrastructure and inefficient attempts at policy making that led investors and millers alike wondering what the government was really trying to achieve.
But with the 25% ethanol blend back on schedule and state-sponsored investments in replanting millions of hectares of cane over the past couple of years, Brazil appears ready to re-approach the market with everything it’s got. Just in time for a surplus that has prices already hovering near the break-even mark.
The Brazilian Agriculture Ministry's commodities forecaster Conab said in its first forecast for the season that it expects sugarcane production to rise 11% in 2013/14 to 653.809 million metric tonnes from 588.916 million tonnes in 2012/13. JOB Economia sees the centre-south rising to 590 million tonnes from 535 million in 2012/13 with sugar production at 36 million tonnes, up from 34 million tonnes last season.

It’s the global surplus at the moment and its impact on prices that is the worry, however. This price band is going to be a major acrobatic act for Brazilian mills to try and balance. Thankfully earlier in the season, due to rains, the focus is typically on ethanol production rather than sugar. That will keep sugar prices stronger a little longer, as was demonstrated with Sao Paolo sugar prices last week that held steady rather than continued to fall.
A surplus market means there’s plenty of sugar available for anyone who needs it, something which has kept trade moving swiftly even during the inter-crop. Backlogs at the ports earlier this year that are only now beginning to ease up are demonstrative of that continued demand, the continued availability…and the opportunity for impending disaster come May or June when a bumper soybean and maize crop seeks to use the same ailing port infrastructure to export.

Analysts fear that prices for soybeans could drop sharply as the US crop comes online, which will in turn boost demand for exports and further congest the ports. Continued demand early in the year for sugar, mixed with a typical downing of tools by dockworkers just to add spice to the mix, meant backlogs that give a hint as to what could come further down the line.
But that’s exactly where ethanol comes in. If prices drop significantly due to increased sugar production and that is later met with potential port backlogs, then the mills can just back away from their sugar plans to focus on ethanol. That flexibility in their milling is built in to achieve this exact kind of balancing trick to mitigate their own price returns, and as long as ethanol demand remains healthy then they should be able to manipulate global sugar prices just fine.

Policies meant to avoid huge imports of maize ethanol from the US during the inter-crop season by requiring mills to keep ethanol supplies on hand appear to have done the trick. Ethanol prices have remained at reasonable levels while increased demand from raising the anhydrous blend rate back to 25% will also ensure domestic demand for ethanol.

What the Americans do might provide some interesting fireworks for the market, however. At the moment, Brazilian ethanol counts as an “advanced biofuel” getting premium prices along with premium market share thanks to an established quota under the Renewable Fuels Standard that carves out space for advanced biofuels. But the Renewable Fuels Association is trying to get the Environmental Protection Agency to wind down that figure, saying there won’t be enough supply from Brazil or from domestic biodiesel to fill the demand.
But if sugar prices start slipping any closer to the break-even point, the ethanol boys in Washington will have their heads spin at the speed with which the shift moves to ethanol. Already the sugar market is sensitive enough to react quickly to the port backlogs earlier this year, so there’s little doubt they’ll do what mills can do to make sure prices don’t go lower than they already are. And that answer is ethanol, so the US market had better remain open for it.

With the soybean and maize boom expected for May and June, clogging ports for sugar exports, the decision to make ethanol may be made for them in any case. Exports to the US and other markets would be guaranteed then with no need for policies changes elsewhere to compensate for Brazil’s inability to supply. Because if there’s anything that Brazil wants to prove right now, is its ability to supply and show that it remains the sugar and ethanol supreme leader.
The beginning of any season, be it spring or crush, starts off with optimism that this will be “the year.” There’s a lot of potential for Brazil to succeed this year, but there’s also plenty of chances for everything to nosedive and they’ll just end up with a snow-covered spring instead of one full of flowers and promise (figuratively speaking, of course).