Sugar prices slow decline, after sharp drop in Brazilian output

12.12.2017

Sugar futures staged a - temporary - revival after data showed output in Brazil’s Centre South region tailing off faster than had been thought, hampered by wet weather as well as a preference for making ethanol.

The Centre South, responsible for some 90% of Brazilian sugar output, produced 734,000 tonnes of the sweetener in the second half of November – a slump of 35% on volumes in the same period last year.

The extent of the decline reflected largely a 22% drop in the volume of cane crushed, to 15.2m tonnes, thanks to wet weather setbacks to harvesting.

“The fall in the milling [volume] is due to rains, which made harvesting in important sugarcane areas difficult,” said Antonio de Padua Rodrigues, the Unica technical director, adding that onset of seasonal closures by more mills had also undermined output.

The number of Centre South mills registered as having shut down as of the end of last month reached 147, up from 43 as of the end of October, but below the figure of 167 as of the close of November 2016.

Centre South mills typically shutdown late in the calendar year, as the rainy season begins, before restarting around April, the start of the sugar marketing year in Brazil.

Sugar vs ethanol

However, the extent of the drop in sugar output also reflected an unusually strong preference by mills for turning cane into ethanol rather than the sweetener, with 63.2% of crop going to make biofuel, reflecting price incentives as a well a seasonal trend.

“In the final months of the harvesting cycle, it is natural for sugar production to decline,” Mr Rodrigues said.

“This year, however, the trend was intensified by the relative prices between sugar and ethanol that were more attractive to the latter,” and which “allowed a considerable advance in ethanol sales”.

Brazilian ethanol demand has been buoyed by a rise in domestic prices of rival fuel gasoline, in the face of higher oil prices, with Brent crude on Monday touching $64.85 a barrel, its highest since June 2015.

‘Energetic balance’

The 36.8% of Centre South cane dedicated to sugar is unusually low, and indeed below a figure of 40% which is often seen as the floor to the production mix.

“All sugar-and-ethanol mills are designed with an ‘energetic balance’, which seems to limit ethanol to 60% of processing capacity, ie sugar to 40%,” said Marex Spectron earlier.

“But most mills can always squeeze a few percentage points more if there is sufficient incentive.”

‘Large surplus ahead’

In New York, raw sugar futures for March - which stood at 14.00 cents a pound ahead of the data, down 0.4% on the day – staged a temporary recovery afterwards, to 14.10 cents a pound.

However, the rally faded in midday deals, when the March contract stood down 0.9% at a six-week low of 13.93 cents a pound.

“Sugar fundamentals continue to point to a large surplus next year despite more ethanol being produced out of cane in Centre South Brazil,” said Sucden Financial.

“Producers elsewhere are expected to step up production, with Thailand, India and the European Union, which increases the hedging pressure by producers at a time when no end user of note is expected to step up to absorb some of the extra supply.”


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