BRAZIL - Mills cancel sugar export contracts to produce ethanol

A big drop in sugar production could lead to a global sugar shortage, according to traders.

Brazilian sugar mills are canceling some sugar export contracts and shifting production to ethanol to cash in on high energy prices, according to people with direct knowledge of the business, raising concerns of a sugar shortage.

Almost all companies involved in the sugar trade in Brazil have had cancellations, a trader at a major international commodities trader told Reuters during Sugar Week in New York last week. He estimated total cancellations so far at 200,000 to 400,000 tonnes of raw sugar.

“This is happening because of the change in the production mix and also because of the delay in the harvest,” the trader says.

Brazil exports around 2.2 million tons of sugar per month during the peak of the harvest. A big drop in sugar production could lead to a global sugar shortage, say some traders.

Most mills in Brazil are flexible and can partially change their sugar or ethanol production. At the moment, production is shifting in favor of ethanol, as high energy prices driven by the recovery from the pandemic and the war in Ukraine spur more fuel production.

Recent analyst projections show lower sugar production figures and higher ethanol volumes as biofuel sales have become more profitable for mills. Ethanol sales increased 2.6% in April.

A second trader, who also works for a large international food trader, confirmed the cancellations – known in the industry as “washouts” – and said most traders are trying to be flexible when trading. “It's take-or-pay contracts, there's a fee, so sometimes the cost can be high for the mill,” he said.

An executive at one of Brazil's biggest mills, who asked not to be named, said the gains from switching from sugar to ethanol outweighed the costs of cancellations. Brazil is the second largest producer of ethanol after the United States.

“Ethanol sales are paid in a day or two, while sugar exports take much longer, and mills have a lot of bills to pay at the beginning of the harvest,” he said.

Hydrous ethanol was trading at the equivalent of the sugar price of 20 cents a pound at the end of last week, while sugar futures in New York were trading at just over 19 cents a pound.

In the past harvest, the mills used 45% of the sugarcane harvest to produce sugar and 55% to produce ethanol. Each percentage point corresponds to about 700 thousand tons of sugar.

According to data from the Sugarcane Industry Association (Unica), the lowest sugar mix was 34.3% in 2019, a year of low sugar prices. The highest was 49.7% in 2006, when higher prices prevailed.

Source: Reuters?-?17 mai 2022 - 10:40

NO REASONS TO PANIC

1 - Cancellations occur more for Raw Sugar contracts. Generally, refined sugar contracts of the ICUMSA 45 and ICUMSA 150 type are not canceled

2 - Although 80% of mills in Brazil are capable of producing both sugar and ethanol, not all of them run the risk of tarnishing their reputation by canceling contracts. Reputation is gold in this market full of scammers and fake sellers

3 - This movement of "cancellation of contracts" was already expected since there was a great appreciation in fuels in the global market, due to the war in Ukraine

The bad news is that the appreciation of fuels must remain as long as the war continues. In this way, the supply of sugar will decrease in the world's largest producer and exporter, Brazil.

Reducing supply, the price tends to rise even more and this is an expectation for the second half of 2022.

Another factor of concern is that sea freight should also rise in the second half of the year. With this, we recommend that importers close supply contracts now between May and June and protect their profit margins.

The scenario is a global food crisis and if this war directly involves NATO, then the whole world will suffer the consequences. Some countries are already stockpiling food, restricting exports, as did India by banning new sales of wheat to the foreign market.

Whoever loses the team will pay for very high sugar prices in negotiations between July and October, when the harvest begins in India.

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