BRAZIL: 'World's sugar powerhouse at a crossroads,' Macquarie says
Published: 06/13/2012, 9:01:18 AM
Macquarie has ditched forecasts of a rise in sugar output in Brazil this year in a report which warns that finances of sugar mills are so perilous that ironically, despite waning production prospects, they pose a threat to prices, according to agrimoney.com.
Macquarie cut its forecast for sugar output from the world's top producing country by 1.3 million tonnes to 35.8 million tonnes, putting a second successive annual decline on the cards after a decade of straight increases.
The downgrade reflected in the main a 15 million-tonne cut to 485 million tonnes, the lowest in at least four years, in the estimate for the cane crush in the centre-south, responsible for approaching 90% of Brazilian sugar output, thanks to a double whammy of poor weather, rising production costs and red tape which have curtailed mill productivity.
The estimate for the crush in Brazil's northeast, hit by "acute" drought concerns, was trimmed by 2.0 million tonnes to 65.0 million tonnes.
The bank, following a visit to Sao Paulo state in the centre-south, estimated cane yields staying little changed this year at 68 tonnes per hectare, below the typical 86 tonnes.
"What we saw did not look promising. Adverse weather -- droughts, frosts -- and lack of husbandry that have reduced yield potential in cane," Macquarie said.
However, mills' ability to invest in raising yields has been curtailed by weak finances – despite high sugar prices over the last year three years -- sapped by high levels of borrowing, rising wages and the impact of running operations capable of processing 620 million tonnes of cane at well below capacity.
"With low cane volumes in successive seasons, the lack of throughput is providing a fixed-cost burden that directly hits the bottom line," the bank said.
Ironically, the impact of mills' poor performance would be, for now, to depress sugar prices, with their poor financial state curtailing their ability to sell in advance, leaving them reliant on the spot market.
"About 30-40% of the mills did not have access to enough finance to permit them to hedge, implying that many will be selling at spot prices over the coming weeks."
So while terming Brazil "an important bullish risk in sugar," Macquarie forecast that prices "will likely still head lower in the short term as unhedged producers sell on to the spot market," and with output from elsewhere boosting supplies.
"It is only from end third quarter that weather uncertainty, for example strength of monsoons in India and Thailand, beet-growing climate in Europe and rainfall in Brazil, has the potential to add a risk premium for the supply outlook for 2012-13 sugar."
The bank added that Brazil's problems may not end this season, given the "distressed" nature of its mills, which "continues to impair investment" in the sector.
"Our trip… gave us a sense of forewarning that the world's sugar powerhouse was at a crossroads," Macquarie said. "After having been the main driver of sugar production expansion around the world in the past decade, the outlook looks shaky.
"Brazil cannot be relied on to keep expanding sugar production at the rate we have been used to."
One solution to the problem would be further investment from the foreign groups such as US-based Bunge, France's Louis Dreyfus and Singapore-based Noble Group which have set up Brazilan cane operations.