Delays in Brazil: better cane but short term pain

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Brazil’s crush is around 50 million tonnes of cane behind last year, following wet weather and planned delays to the crushing season.

Brazil’s cane sugar crop has been underway for two months. However, the crush is around 50 million tonnes of cane behind last year, following wet weather and planned delays to the crushing season. Brazil is now the key market dynamic. Sugar prices have rebounded as weather has re-emerged as a potential risk. However, the short term disruption will help cane development and agricultural performance. Brazil is now in a better position to deliver an improved crop than it was at the start of the season. We confirm our forecast of 505 million tonnes of cane, and this number could move higher still.

A Slow Start

  • This year is the first in a decade that will see little increase in acreage. Instead, the sector has focused on reducing the average age of cane, after a few years of low cane renovation, and increased agricultural yields.
  • The fall in agricultural yield has reduced cane availability and created spare crushing capacity, triggering a delay in the start of the season to allow the cane to benefit from the April rains.

Short Term Pain

  • The decision to delay was further compounded by an unseasonably wet June: for the first time in a decade only around 25% of the expected cane total will have been harvested by July 1, down from 36% last year.
  • This season's production mix has been heavily weighted towards sugar; by the first half of June the cumulative cane allocation was 45.6%, the highest mix in 6 years.
  • Real weakness has boosted sugar export returns in domestic currency: average Q2 prices in Reals are at a record. In contrast, domestic ethanol prices have remained stable. The Brazilian government increased gasoline prices, but cut taxes, resulting in an unchanged price for consumers and no incentive for the sector to shift away from sugar and its higher returns.

CS Brazil Exports

The slow start to the season has left port stocks low in June, putting upward pressure on the market. Raw sugar shipments during the second quarter of 2012 stand at 3.8 million tonnes, 1 million below last year.

Increasing Exports

Following the slow start, the sector will need to deliver a strong crushing performance in Q3 and Q4 in order to close the gap on last year, with weather a key determinant.

Currently, Q3 looks drier than Q2 while the unexpected June rains have given us more confidence that our forecast of 505m tonnes of cane will be achieved. In fact this number could move higher.

Conclusion

The market is once again pricing in a level of risk as the delayed start of the Brazilian season has delayed the onset of the surplus in the physical market.

However, though the level of weather risk is now greater so too is the level of confidence in the quality of the cane.

As a consequence, despite the slow start and poor production numbers so far, Brazil is actually in a better position to deliver an improved crop than it was at the start of the season.

Toby Cohen, Czarnikow director, said: "The wet weather in June has pushed up prices, and added to the delays to the start of the crushing season; but the extra time can only help agricultural yields and boost the final crop."

Peter de Klerk, Czarnikow analyst, said: "Prices may have rebounded from recent lows on unexpected weather and logistics risk. But we are confident about our forecast for 505m tones of cane, as the longer maturation time will have positive implications."

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