June 2011 - Brazilian Production to Fall For the First Time in a Decade

Supply Risk Highlights Market Fragility

Sugar prices have rallied to 30c - despite the widely forecast return to surplus during the 11/12 season. The rally has been driven by ongoing pressure on load port logistics which have been pushed to keep up with the pace of demand coupled with the late start to Brazil’s 11/12 crop. For the first time in over a decade Brazilian production is expected to fall year-on-year, which, given Brazil’s dominance of the export market, has brought supply risk to the forefront and has again highlighted the fragility of the sugar balance sheet.

  • Southern Hemisphere production, which accounts for over 90% of global raw sugar exports during Q3 (and 75% of raw sugar supply on an annual basis) is now forecast to fall this year with the downgrading of Brazil crop.
  • As a consequence, raw sugar buyers, who had been hoping for an increase in global production to result in an increase in supply, are once again facing the risk of lower supply

 

  • The CS Brazil crop is critical for the world market and over the past decade the industry has expanded cane year-on-year.
  • However, the global financial crisis led Brazilian growers to cut back on cane renovation to reduce costs, leading to lower agricultural productivity.
  • Falling productivity and last year’s drought means that the 11/12 season looks set to be the first in a decade in which cane availability will decline.
  • The decline in agricultural yields also risks undermining Brazil’s competitive position vis-à-vis other cane growing industries.
  • We expect 535m tonnes of cane to be processed this season, which is down 40m tonnes on our initial forecast, and less than last year’s 557m tonnes.

 

  • Last year saw pent-up demand overrun CS Brazil’s load capacity in Q3’10, leading to long queues of vessels waiting outside ports.
  • Despite measures to deal with the problems, the shortfall in early season supply has seen vessels nominated for May slip into June and those nominated for June into July.
  • CS Brazil sugar production is currently down over 25% on last year.

 

  • Given the dependence on Brazil the biggest risk that the global sugar market faces today is a poor crop in Brazil, which will have a disproportionate impact on trade.

 

Toby Cohen, Czarnikow director, said: “Although the global production balance sheet indicates that the sugar market should lose its risk premium the physical sugar market is continuing to behave as though risk never went away. The extreme events around the July expiry, despite peak Brazilian production, have once again highlighted the fragility of the sugar balance sheet and raise the prospect of another period of market volatility driven by Brazilian agricultural performance.”
Peter de Klerk, Czarnikow analyst, said: “Though almost every producer has plans to increase production, hopes for that growth are now entirely within the hands of the Northern Hemisphere and are some way from being realised. As far as the market is concerned this raises the question: Will the return to surplus once again prove to be illusive?”

Notes to Editors

For further information please contact:

Czarnikow
Toby Cohen
Peter de Klerk 020 7972 6600

Cubitt Consulting 0207 367 5100
Caroline Merrell
Fergus Brady

About Czarnikow:

Czarnikow Group is one of the most respected names in agricultural commodity markets and has been providing high quality market services since 1861. Czarnikow operates in three core areas; sugar, biofuels and corporate finance. Its success is built upon knowledge of the market, confidentiality, reliability and independence.

Czarnikow deals with around 10% of the 50 million tonnes of sugar that is traded annually, which means that it has a first hand presence in all major sugar markets of the world. Czarnikow works throughout the entire supply chain providing services to growers, millers, refiners, beet producers, traders, merchants and industrial users.

Czarnikow operates from a head office in London and a network of 10 regional offices to service clients and customers globally.