Bloomberg News

Sugar Surplus May Drop 50% on Brazil Ethanol Switch, Itau Says

March 02, 2012

A forecast sugar surplus may drop as much as 50 percent if millers in Brazil, the world’s largest producer, direct more cane to making ethanol in the season starting in April, according to Banco Itau BBA SA.

Sugar supplies are set to outpace demand by 9.7 million metric tons in the 12 months ending in September, according to broker and researcher Kingsman SA. The following year will see a surplus of 5.5 million tons, the Lausanne, Switzerland-based company estimated on Feb. 7. Producers in Brazil use sugar cane to make both the sweetener and the biofuel.

“There is a surplus in the global market, but any changes in the mix in Brazil toward ethanol would easily eliminate half of the sugar surplus,” Giovana Araujo, an analyst at the bank, said by phone from Sao Paulo yesterday. “That’s the reason this surplus is not translating into lower prices.”

Sugar has climbed 7 percent in New York so far this year. The price dropped 27 percent in 2011, the biggest decline in a decade, as traders anticipated a surplus after three years of deficits. Sugar prices will average 23.9 cents a pound this year before sliding to 22.1 cents a pound next year, Araujo estimated.

Sugar cane output in Brazil’s Center-South, the country’s main producing region, will rise to 530 million tons in the 2012-13 season, according to Itau. Sugar production will be 33.7 million tons, the bank estimates.

Cane production fell for the first time in a decade this season after dry weather, old cane, frost and flowering cut yields, according to industry group Unica. Brazil harvested 494.3 million tons of cane in 2011-12 as of Feb. 15, the group said on Feb. 29. Most of the harvest has already been completed.

Dry Weather

Cane production may fall short of the forecast if dry weather damages the crop, Araujo said. Cane replanting rates will remain below the historical average, she added.

“Part of the Mato Grosso do Sul is being affected by dry weather now and the prospects overall for next year are more for a number below 540 million tons and may even be below 530 million tons,” she said.

Millers are set to continue favoring sugar production at the expense of ethanol on higher prices for the sweetener, according to the bank. Brazil is likely to continue to import ethanol from the U.S. to fulfill its domestic needs.

Sugar production in India, the world’s second-largest producer and biggest consumer, may fall to 24 million to 25 million tons in the 2012-13 season that begins in October there, Itau estimates. That compares with 26 million to 28 million tons in 2011-12. Output will slide partly on high cane prices that limit millers’ profitability and farmers switching to other crops, Araujo said.

Indian Surplus

“In 2012-13, we will see a more balanced situation between production and consumption in the country,” she said.

India will have a domestic surplus of 3 million to 4 million tons in the sweetener in 2011-12, Abinash Verma, director general of the Indian Sugar Mills Association, said at a conference in Dubai on Feb. 5.

Sugar prices are set to remain supported because of concerns about the 2012-13 crops in Brazil and India, Araujo said.

“I would not expect any sustainable downwards correction to prices as long as the market does not have visibility about the potential numbers.”

To contact the reporter on this story: Isis Almeida in London at ialmeida3@bloomberg.net

To contact the editor responsible for this story: John Deane at jdeane3@bloomberg.net


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