South America Calling

Brazil's sugarcane harvest has gotten off to a fast start in a year expected to produce more ethanol but fewer ethanol exports.

Cane crushing in April, the first harvest month in the top-producing center-south region, totaled 41 million metric tons (mmt), up 190% on the year after autumn rains eased in the second half of the month, according to the Brazilian Sugarcane Association (UNICA).

That's good news for mills as Brazil has a lot of sugarcane to crush in its eight-month harvest season. Production will rise 11% to 589 mmt in 2013-14 amid good weather and widespread replanting.

Brazil's sugarcane is used to produce sugar and ethanol fuel. Over the last four years, the amount of cane directed to ethanol has declined due to more attractive margins on sugar. But in 2013-14 that dynamic is set to reverse due to falling sugar prices and some government stimulus to ethanol.

According to UNICA, ethanol production will total 25.4 billion liters (6.7 billion gallons), up 19% on the year and accounting for 53.8% of the crop. Sugar output will total 35.5 mmt, up 4.1% and accounting for 46.2% of the crop.

However, ethanol exports are expected to subside to 2.7 billion liters (713 million gallons) in 2013-14 from 3.5 billion (924 million gallons) last year due to growing domestic demand.

Brazilian ethanol is used in hydrous form as a vehicle fuel and in anhydrous form as a gasoline fuel additive.

Domestic demand will be stimulated by the government's decision to raise the percentage of anhydrous ethanol in gasoline to 25% from 20%.

Sales will also be boosted by a tax break introduced for hydrous ethanol. By offering tax credits to offset PIS/Cofins tax contributions, Brasilia will potentially reduce the fiscal burden by around 6%.

So the ethanol outlook is improved this season for Brazil's massive sugarcane industry but structural issues remain.

Prices for sugar and ethanol may be attractive enough for mills to plant more sugarcane this year, but margins aren't good enough to stimulate the building of new sugar and ethanol plants.

That's a problem as this year's crop will occupy approximately 97% of the center-south's crushing capacity and increased demand will require a 70% increase in cane output over the next decade, according to Datagro, a local sugar and ethanol consulting firm.

Instead of building new plants, large players such as Sao Martinho, Louis Dreyfus and Cosan are more interested in acquiring existing mills. And with the accumulated debt of center-south mills nearly surpassing total revenues in 2012-13, there are a lot on the market. Unica estimates that 20% of center-south mills can't generate sufficient cashflow to operate.

The main reason that mills won't invest is government fuel price controls, which effectively cap ethanol prices. The administration holds down gas prices as a means of keeping inflation in check. At current price levels, the policy squeezes ethanol margins and, more generally, the lack of market transparency due to the intervention turns off investors.

(AG)

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