Sugar industry analysts in Brazil expect the sharp hike in local fuel prices to result in a substantial reduction in the volume of sugar exported from that country during the new crop season that starts in April.
As the world’s largest sugar supplier, the move by Brazilian oil company Petrobras to increase fuel prices by nearly 19%, due to a price surge in global crude oil prices resulting from the Russia-Ukraine conflict, will set ethanol prices soaring, according to Reuters.
That would, in turn, drive sugar mills in Brazil to produce more biofuel at the expense of sugar.
Brazilian sugar and ethanol companies had the industrial flexibility to produce more or less sugar or ethanol depending on market prices. If ethanol prices increased, they could divert more sugar cane to biofuel production.
If ethanol prices rose to levels similar to Brazilian petrol prices, the selling price of ethanol would surpass that of sugar for the first time in years, a sugar industry analyst Claudiu Covrig said.
He added that even if mills increased ethanol prices by less than 19% to boost market share, they would still “make more money selling biofuel than exporting sugar”.
Covrig estimated that Brazil could reduce sugar production by about 1,2 million tons in the 2022/23 season.
“A rough guess is [the mills] might be able to shift 2,5 million tons of sugar, if the price difference remains attractive,” Michael McDougall, managing director at Paragon Global Markets in New York, told Reuters.
He added that mills could even cancel sugar export contracts with commodities traders if the price difference was favourable enough, further reducing the volume of sugar that would be produced.
According to the Brazilian Confederation of Agriculture and Livestock, Brazil was the world’s top producer and exporter of sugar cane, supplying 50% of the world’s sugar, producing about 654,8 million tons of sugar cane, 41,25 million tons of processed sugar, and 29,7 billion litres of ethanol annually.
Sugar and ethanol manufacturing were key to the Brazilian economy, despite sugar cane farming making up just 1% (8,66 million hectares) of the country’s total land area.
It was also a key sector from a social and developmental perspective, with about 40% of the sugar cane processed by Brazilian mills supplied by some 76 000 independent farmers, who in turn supported hundreds of thousands of people, the association said.