Triple whammy sends Brazil sugar output tumbling

(Agrimoney) – Sugar futures touched a two-month high after data revealed a sharp slowdown in Brazil’s cane harvest, further underlining ideas of a “sudden death” to crushing season thanks to a hangover from early-2014 drought.

Sugar production in Brazil’s Centre South, responsible for some 90% of domestic output, slumped to 1.64m tonnes in the second half of September, down 29% from the first half, cane industry group Unica said.

The slide reflected largely a sharp slowdown in the cane harvest, reflecting rains “that hit important cane-producing regions”, Antonio de Padua Rodrigues, the Unica technical director, said.

However, the group also flagged a dent to cane crushing volumes from the impact of drought in reducing yields, with some mills now running out of crop to process.

“A smaller supply of raw material for processing, resulting from intense drought, also has accelerated the early finish of the harvest,” Unica said, noting that 10 mills had closed so far for 2014-15, compared with two a year ago.

Many mills do not typically close until November-December, when the onset of the rainy season makes harvesting unfeasible.

‘Strong reduction in sugar production’

Mr Rodrigues added that the slide in crushing volumes “shows the prospect of strong reduction in sugar production in the coming months”, a dynamic some commentators have termed “sudden death”.

Sugar output in the second half of last month was also squeezed by mills turning a greater proportion of what cane was available into ethanol, rather than sugar.

The proportion turned into sugar fell from 44.0% in the first half of September to 39.2% in the second half – the lowest proportion for the time of the season in the last 10 years.

The relationship between ethanol and sugar prices is deemed by many commentators to have been favouring the biofuel, in terms of returns offered to mills from cane crushing.

Indeed, earlier on Thursday, consultancy Platts Kingsman said that factors such as long-term sugar supply deals and dollar denominated debts – with sugar a bigger export earner – had, until late, encouraged mills to favour sugar more than might appear justified.

“Finally, encouraged by recent rains, the mix is starting to react more to prices,” Platts Kingsman said.

Market reaction

The strength of the data surprised many investors, amid some expectation that crushings had remained high in the second half of last month.

Indeed, Morgan Stanley earlier in the week proposed that “relatively dry weather in Centre South Brazil may still help sugar production surprise to the upside in Unica’s next fortnightly crushing statistics”.

The immediate market reaction was to send raw sugar futures for March to 17.20 cents a pound, the highest for a spot contract since early August,

However, the contract had fallen back to 17.02 cents a pound 45 minutes after the data were released, up 0.6% on the day, and around where it had stood ahead of the statistics.