Global Crisis Still Slowing Down Brazil’s Ethanol and Sugar Industry

Sugar cane plantThe Brazilian Sugarcane Industry Association’s (UNICA) estimates project a 10% increase in sugarcane production in the 2010/11 harvest, which officially begins April 1st in the country’s South-Central region. 

UNICA’s projected total sugarcane harvest should reach 595.89 million tons, compared with 541.50 million tons estimated for the 2009/10 harvest, which officially ended March 31st.

According to UNICA’s Technical Director, Antonio de Padua Rodrigues, the increased harvest forecast has to be carefully evaluated. “The cane available for ethanol and sugar production in the 2010/11 harvest is virtually the same as in the 2009/10 harvest, which was severely hampered by unfavorable weather conditions. In other words, in terms of crushing, the new harvest should be what the industry was simply unable to complete in the previous harvest.”

The data collected by UNICA, as well as satellite images of South-Central Brazil, indicate that there was no significant expansion of the cultivated area in traditional sugarcane regions.

The expected increase in production for 2010/11 can be attributed in part to a significant volume of “bisada” cane (sugarcane that was not processed in the last harvest, therefore growing for nearly two years) and to a lesser extent, the gradual increase in production at new mills, especially in the states of Mato Grosso do Sul, Goiás and Minas Gerais.

In great measure, the slowdown in the expansion of the cultivated area can be traced to delayed impacts of the global financial crisis in late 2008 as well as low prices experienced by the cane industry since 2007. These factors led to a shortage of available capital and prevented numerous mills from investing in additional planting over the last two years.

Long range weather forecasts for 2010 indicate a “wetter” than normal beginning of the harvest, followed by colder, dry conditions during winter months (July, August and September). This is the period where over 45% of the cane is harvested in South-Central Brazil.

The expected weather conditions point to a greater increase in sugar concentration than in the past harvest. But even with a probable improvement, UNICA is projecting that the amount of total recoverable sugars (ATR in Portuguese) for the 2010/11 harvest will remain below historical levels because of three main factors:

– Advance of mechanized harvesting;

– Early launch of the harvest season by several mills that began crushing in March;

– High volumes of “bisada” cane to be harvested in 2010/11 (Over 12% of available cane for the new harvest is cane that was not crushed in the past harvest)

Therefore, the amount of ATR per ton of cane should reach 138.59 kilograms, 6.3% higher than the 130.36 kilograms per ton that will likely be the amount when final numbers for the 2009/10 harvest are compiled. In the largest cane producing state, Sao Paulo, the historical average ATR per ton of cane is 145 kilograms.

Low prices paid at the mills in recent years and atypical weather conditions in 2009 severely impacted the profile of the sugarcane crop to be harvested in 2010/11. Besides high volumes of “bisada” cane, a significant reduction is expected in the amount of first and second cut canes, which are the most productive. Therefore, the proportion of older and less productive cane is expected to grow.

Crop aging should reduce the prospect of increased sugarcane productivity in 2010/11. This imbalance in sugarcane fields should also impact more intensely the amount of cane available for the following harvest, in 2011/12.

That’s because most “older” sugarcane (fifth or more cuts) represents nearly 25% of the sugarcane area in the Brazil’s South-Central region. Planted areas will need to be reformed (new planting), leading to a probable reduction in the area available for harvest in 2011/12 in many regions.

“The industry will need to invest heavily in renewing sugarcane fields this year, to ensure there is supply growth as of 2012,” assesses Rodrigues.

UNICA estimates that 10 new units will launch their activities in the 2010/11 harvest. The figure is well below what has been observed in recent years, reflecting the slowdown in terms of growth in the cane industry. There were 25 new units in 2007/08, 30 in 2008/09 and 19 in 2009/10.

The new units expected for 2010/11 are located in the states of Minas Gerais (3), Goias (2), Sao Paulo (2), Mato Grosso do Sul (1), Mato Grosso (1) and Rio de Janeiro (1).

Of the total cane volume expected for the 2010/11 harvest, UNICA projects that 43.29% will be destined for the production of sugar, a slight increase compared to the 42.57% observed in the final harvest figures for 2009/10. Therefore, as in previous years, most of the cane crushed in the new harvest (56.71%) will be used for ethanol production.

Sugar production in the new harvest is expected to total 34.09 million tons, a 19.1% increase over the 28.63 million tons to be produced in 2009/10. Ethanol production, in turn, is expected to reach 27.39 billion liters, up 15.6% over the 23.70 billion liters in the previous harvest.

Of the 27.39 billion liters of ethanol projected for 2010/11, 20.14 billion are expected to be hydrous ethanol, a total 15.40% higher than the 17.46 billion liters produced in 2009/10. The amount of anhydrous-type ethanol should reach 7.25 billion liters, a 16.20% increase over the volume produced in the last harvest.

Brazilian sugar exports are expected to grow at a slower rate than overall production. While sugar production growth is expected to reach nearly 5.5 million tons, exports should advance only 3.3 million tons, reaching a total of 24.3 million tons exported in the next harvest.

Every two years, there is a cyclical movement in the industry that alternates export growth with increased production. In the 2010/11 harvest, about 9.79 million tons of sugar should remain in the domestic market to replenish inventories and meet domestic demand.

Contrary to what occurs in the sugar market, ethanol exports should present a significant decline in the 2010/11 harvest, reaching 1.80 billion liters compared to the 2.75 billion liters shipped in the previous harvest. The drop is expected to reach 34.5% compared to exports in the previous harvest.

The increase in production combined with a contraction in exports will result in an increase in domestic ethanol supply of more than 4.5 billion liters (1.9 billion gallons) , which is sufficient to meet future internal market demand.

It should be noted that motor vehicle sales remain strong, with Flex-Fuel vehicles accounting for more than 90% of light vehicle sales in Brazil. Projections indicate that by the end of the 2010/11 harvest, the Flex fleet, which today represents 40% of the total fleet (Otto cycle), should reach 49%. Considering ethanol production and export estimates in the new harvest, the ethanol supply and demand scenario in the domestic market should remain balanced.

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