Missing: About 1 million metric tons (MMT) sugar in some seven weeks. From April through mid-May, Brazil’s center-south produced 4.15 MMT of sugar, up 4.9 percent from output during the same period last year. Though cane crush in these seven weeks was up 27.3 percent YoY, only 35 percent of that cane was processed into sugar. A year ago, that sugar share was 47 percent of cane use, and if that level had been maintained at the start of the current season, production would likely have passed 5 MMT—hence, a million metric tons of “missing” sugar.
The beneficiary of the higher cane crush is ethanol output, up 39.3 percent for the crop year to date. Brazilian drivers are choosing E100—100 percent ethanol—over gasoline-ethanol blends. The economics are clear: In many areas, E100 is simply more affordable, partly due to policy changes such as tweaked fuel taxes. Hydrous ethanol manufacturing has seen the bulk of gains, up 81.3 percent this season at 3.57 billion liters.
Brazil consumption of fuel ethanol
Source: ANP, ABEGAS, UNICA
Brazil’s sugar output fell in 2017/18—with 2017/18 center-south sugar output making only marginal gains—and is expected lower still in 2018/19. Ethanol output picked up by about 1 percent in 2017/18, with the trade now talking about output growth above 5 percent for 2018/19. Overall, demand for ethanol is favorable (see chart above), even if actual ethanol exports have flagged in the last two seasons following higher imports in 2015, with retail sales of fuel ethanol up by about a third in the last quarter.
Naturally, prices have impelled the decline in the sugar share. As crude oil continues its recovery from its 2016 lows, closing the notional gap with ethanol and supporting ethanol pricing. World sugar prices, meanwhile, have collapsed to three-year lows, approaching levels that could justifiably be called unsustainable in the longer term.
#11 World Sugar, Crude Oil, Ethanol Futures Price History
Source: DTN, McKeany-Flavell
From the perspective of the Brazilian market, ethanol made gains throughout last season. As the chart below shows, world sugar (in reals) has fallen in the last 18 months while domestic ethanol appreciated, coming off recent highs in this new season as the high pace of ethanol production was confirmed.
Brazil Ethanol Reference Price vs. #11 Sugar Futures
Source: ANP, McKeany-Flavell
The Brazilian real’s value lost ground slowly from 2011 through 2013, falling more rapidly in 2014 and 2015 on economic and political uncertainty. All this made exports more attractive to Brazil’s sugar and ethanol industry. That advantage for exports was reduced as the real made modest gains in 2016, holding onto them through 2017 and into 2018 as domestic economic indicators turned more positive.
#11 Sugar Futures vs. Brazilian Real Exchange Rate
Source: McKeany-Flavell
Is a turnaround possible for sugar production? Unlike their counterparts in many other sugarcane grower countries, Brazilian mills have the capacity and the demand base to sell ethanol into the domestic market—regardless of the trade barriers that have hampered its ethanol exports. (According to a source cited by Reuters, Brazilian mills canceled between 400,000 and 500,000 MT of 2018/19 export contracts.) As the chart below suggests, the real’s movement curbed sugar price losses within Brazil, but the overall trend remains: While world sugar stocks remain ample, energy prices hold or gain ground, and domestic policies favor biofuels, the country’s industry will continue to favor ethanol.
#11 Sugar Futures vs. Brazilian Sugar Reference Price
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