LACK OF CREDIT COMPROMISES QUALITY OF BRAZIL SUGARCANE FIELDS, TIGHTNESS IN SUGAR MARKETS SEEN INTO 2010

Sugar experts gathered yesterday, May 6, in New York at the ISO/Datagro Sugar Conference to discuss the outlook for the industry. The event was sponsored by the Brazilian Ministry of Agriculture, Cosan, Crystalsev, Bloomberg, and the newly-formed International Ethanol Trade Association, known as IETHA, among other organizations.

Speakers included Joel Velasco, Unica’s chief lobbyist in Washington, Sergey Gudoshnikov, of the International Sugar Organization, and a few other economists.

The outlook for sugar has improved considerably since the beginning of 2008 (chart - source: Cepea, own calculations). Indeed, the commodity was one of the few whose price did not crash in Q3 2008.

Among supporting factors is a prolonged, severe drought in the countries surrounding the Indian Ocean. Australia’s two main river systems have dried up, while the shortfall in India will lead the country to become a net importer of sugar. Indeed, according to Estado de Sao Paulo, one of Brazil’s leading dailies, Mr. Gudoshnikov of the ISO projects a supply deficit of 4.3 million tonnes for 2009. Brazilian output is expected to grow substantially, but the increase will be partially offset by declines in production in India and production issues plaguing Brazilian sugarcane fields. Thus, the tightness is expected to continue into 2010.

This outlook stands in contrast to the situation in the 2008-2009 harvest year, which saw a surplus of 6 million tonnes.

Mr. Gudoshnikov further projects that global imports in 2008-09 will total 50.2 million tonnes, compared to 45.9 million tonnes in 2007-08. He estimates availability for export also at 50.2 million tonnes, an increment of 3.6 million tonnes over the previous harvest year. Dow Jones reports that the ISO places final world inventories at 61.9 million tonnes, a drop from the 69.7 million tonnes of the previous season.

Brazilian Monster Crop not Big Enough

The tightness in supply will persist, even with Brazil’s sugarcane crop expected to reach a record 620 million tonnes, an increment of 47 million tonnes over the output of the 2008-2009 season, which drew to a close at the end of March. A growth of 35 million tonnes is expected for the following season, indicating that the expansion of Brazil’s sugarcane production is slowing down.

Lack of proper care and field renewal, associated with adverse credit and macro conditions, are responsible for the drag on agricultural production. At least 40% of the sugarcane produced in 2009-2010 will come from a fourth cutting (sugarcane plants can be cut up to seven times, with decreased sugar content in the stalks produced each year by new growth).

Fourth cuttings yield from 70 to 75 tonnes per hectare, while first cuttings have a much higher yield: 120 to 130 tonnes per hectare. In the season that has just ended, 18% of the sugarcane processed came from a first cutting; in the current season, that figure is expected to drop to 10%.