Output Revision, Ethanol Outlook Taking Prices Higher
BMI View: We have revised down slightly our forecast for Brazilian sugar production in 2013/14 in line with the latest changes to the country's sugar association's estimates. We caution that the amount of sugar crushed this season will depend on the pace of the crushing rather than the agricultural productivity of the crop. The higher percentage of cane diverted to ethanol at the expense of sugar will limit production growth this season, helping sugar prices higher in the near term. Still, we expect strong sugar and ethanol exports, which will prevent prices from returning to previous highs.
We have revised down slightly our forecast for Brazilian sugar production in 2013/14 in line with the latest estimates from the country's sugar association, UNICA. We now forecast production of 38.0mn tonnes (compared with 39.7mn tonnes previously), a small decrease from 2012/13's output. Frosts and the rainy weather in May and June led to reduced sugar levels; this, combined with the more widespread use of mechanised harvesting, delayed sugar crushing. The country's sugar crop also was affected by pest infestations (primarily broca, or cane borers, and leafhopper), which contributed to lower cane quality in some areas.
|Brazil - Sugar ('000 tonnes) & Ethanol Production (mn litres), LHS & Cane Diverted To Sugar (%)|
We highlight that the amount of sugar crushed this season will depend on the pace of the crushing rather than the agricultural productivity of the crop. UNICA has indicated that agricultural productivity in the harvested area of the Centre South region was up by 10.3% year-on-year since the start of the season, averaging 83.7tonnes/ha this year compared with 75.9 tonnes/ha in 2012/2013. Nevertheless, the volume of cane that will be crushed in the coming months will depend almost entirely on the pace of the harvest, which will be subject to weather conditions. According to UNICA, given that the amount of cane available for harvesting is slightly above 600mn tonnes in total, Brazil will be able to crush about 587mn tonnes of cane if weather conditions remain dry, while a maximum of 580mn tonnes of cane will be crushed if heavy rains start again.
We believe the delays in harvesting are limiting the volume of cane available for crushing. Moreover, the higher percentage of cane diverted to ethanol this year explains the limited upside in sugar production in 2013/14. UNICA indicated that 45.6% of the cane crop is currently being diverted to sugar, compared with an average of 48.5% over the past 10 seasons. The country is expected to produce 26.6bn litres of ethanol this year, a 16.7% increase compared with 2012.
Recent revisions to Brazilian sugar output forecasts, as well as risks related to the harvest in the coming months, will help prices higher in the coming months. We previously expected prices to bottom around USc15-16.00/lb; they have bottomed slightly higher around USc17.00/lb. Sugar prices have seen strength in recent trading, and we expect more short-term strength in the coming weeks. We forecast prices to average USc18.00/lb in 2014 and USc18.50/lb in 2015.
|Front-Month ICE Sugar (USc/lb, weekly) & RSI (below)|
Still, we expect the Brazil's export capacity for sugar and ethanol to be strong in 2013/14, meaning prices should rise only gradually over the short term. We forecast a domestic sugar surplus of 25.9mn tonnes in 2013/14, only slightly lower than 26.5mn tonnes in 2012/13. As a result, we expect the country to export around 24mn-26mn tonnes of sugar in 2013/14, much higher than the 10-year average of 20.4mn tonnes. The US Department of Agriculture forecasts Brazilian sugar exports to reach 29.3mn tonnes in 2013/14, an all-time record. UNICA forecasts that 2.7bn litres of ethanol will be exported in 2013, mostly to the US, Jamaica and South Korea. We believe Brazil will take advantage of the expanding market for second-generation ethanol in the US and the EU to export cellulosic ethanol, as it has little demand for the fuel domestically.
|Notes: e BMI estimates. f BMI forecasts. Sources: 1 CONAB, USDA; 2 USDA.|
|Sugar Production, '000 tonnes 1||36,800.0||38,300.0||38,000.0||39,064.0||39,689.0||40,681.2|
|Sugar Consumption, '000 tonnes 2||11,500.0||e||11,778.5||12,082.4||12,407.3||12,754.3||13,124.7|