Brazil’s Sugar-Cane Sector Shrinks

(Wall Street Journal) – Brazil’s sugar processors are downsizing.

The fewest mills in six seasons — 377 — will be processing cane into sugar and ethanol this season, said Plinio Nastari, president of consulting firm Datagro.

It would be the third consecutive season of declines in the number of mills, highlighting trouble in the sector in Brazil, the world’s largest producer of sugar cane and the top exporter of sugar.

A smaller cane crop due to Brazil’s worst drought in decades and the country’s energy policy are driving the declines, Mr. Nastari said.

Brazil’s state-controlled oil company Petroleo Brasileiro Petrobras SAPETR4.BR -0.17% supports gasoline prices, providing a subsidy that makes it harder for ethanol to compete.

“They are competing with a subsidized product,” Mr. Nastari said, referring to ethanol producers.

Since the subsidies are part of the government’s effort to combat inflation, the measure is unlikely to go away any time this year, particularly ahead of October presidential elections, industry members have said.

“It is unlikely that there’ll be any major policy changes this side of the election in Brazil,” Bunge Ltd. Chief Executive Soren Schroder said in a call with investors last week.

It is the latest in a string of challenges for Brazil’s sugar-processing sector. Mills had already been grappling with low sugar prices. In late January, raw sugar traded on ICE Futures U.S. settled at 14.74 cents a pound, the lowest since June 2010, due to a global glut of sugar.

Bunge has said has put its sugar-milling business under “strategic review.” The company’s sugar and biofuels segment lost $64 million in the first quarter.

Smaller production is another problem for mills, Mr. Nastari said. The cane experienced extremely dry weather at a time when it needed moisture to produce sugar. Producers in Brazil’s center-south, where most of the country’s cane is grown, will likely reap 575 million metric tons of cane this season, down from 596 million tons last season, Mr. Nastari estimated.

While expectations of a smaller crop has helped drive world sugar prices up nearly 20% from January’s lows, Michael McDougall, a senior vice president and head of the Brazil desk at brokerage Newedge, said it hasn’t been a game-changer for mills.

“The current prices just aren’t enough,” he said.