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Editorial Comment

Amidst the global surplus, which some analysts1 puts it at some 18 mln to 20 mln tonnes, and tumbling sugar prices which have fallen below 12 cents/lb, the Brazilian sugar industry has certainly been hit hard. Over exposed as it is in the market place, being both the largest global sugar producer and exporter, it is, more than most, susceptible to market volatility. Mixture of circumstances outside its control have simply informed its woes - from relatively clement weather and rising cane productivity2 through improved crop management supporting increased output not only in major producing countries, but also opportunistic expansion in production by EU sugar producers following the abolition sugar quotas last September and the Chinese import market drying up following change in policy showing preference for relatively small-scale producers and imposition of prohibitive tariffs for the likes of Brazil3.

The credit crunch in 2008 sparked off significant rationalisation. This has been ongoing since, driven by indebtedness which a good part of the industry is still in its clutches. According to Elizabeth Farina, the President of the industry group Unica, around 30% of sugar mills are heavily indebted. According to the local consulting firm MB Agro, the debt level of Brazilian sugar mills is currently estimated at BRL85 billion (US$23.1billion). At its peak, according to the International Sugar Organization, some 414 cane mills operated in the country in 2012, with 104 exclusively producing ethanol, 11 exclusively producing sugar and the remaining producing both sugar and ethanol. With current global sugar price well below the average cost of production further rationalisation of the industry is imminent. According to a recent Bloomberg report, “as many as nine mills may not process sugarcane in 2018-19 due to financial problems, joining a group of about 80 that have stopped production since 2008”4. In 2018, 367 mills were operating according to the Ministry of Agriculture.

It is worth retracing the steps informing the growth of the Brazilian sugar industry. In response to rocketing oil prices in the ‘70s, the Brazilian government initiated the National Alcohol Programme ‘ProAlcool’ in 1975. The intention was to substitute gasoline with cane-based ethanol in automobiles. The effect of the programme in expanding cane output was considerable. Between 1975/76 and 1990/91 sugarcane production increased from 68.5 million to 222.4 million tonnes (+225%), with sugar output increasing by about 25%: while the production of ethanol shot up from 556 million to over 11 billion litres. The expansion in the sector continued unabated until 2008. Over the period 1990-2010, sugar production increased five-fold and sugar exports, 17-fold (see table). The introduction of the flexi-fuel cars in the early 2000s dramatically expanded ethanol output.

One thing that can be definitively said about policy-making pertaining to sugar in Brazil is that it is not nuanced. Expansion in sugar production was effectively supported by cross-subsidising ethanol production. The recently legislated national biofuels policy RenovaBio which aims to increase
energy security via expanding the production of biofuels has given a lifeline to the cane sector. With crude oil prices recently rising to some US$80/barrel, there is a further respite for ethanol producers. Contrary to some critiques of the Brazilian sugar industry and purportedly state support it receives or has received5 at best it has provided a band-aid when things have gone rough, at worst, it has simply been neglected. The factory closures support the latter viewpoint. Latest press reports suggest that analysts are forecasting a reduction in sugar production in Brazil’s centre-south in 2018-19 of up to six million tonnes, with exportable surplus likely to fall to 22.2 mln tonnes (from the peak of 30 million tonnes in 2016/17) and Brazil’s share of the global sugar market falling from 52% to 35%. To bowdlerize John Donne6, do not ask why the Brazilian sugar industry is in a mess, it just is.

Continue reading this article and access additional International Sugar Journal news by downloading the June 2018 issue of ISJ Lite below.

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ISJ Lite is a 'taster' version of the monthly International Sugar Journal, including a sample selection of articles and updates for the sugar industry.

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