Brazil will harvest more sugarcane and produce more ethanol next year as the industry claws its way out of its multi-year slump.
The top-producing center-south region will crush between 615 and 630 million metric tons of sugarcane in the 2016-17 season (April-March), which is 2.5% to 5% higher than this year's projections, according to Agroconsult, a local consultancy.
Brazil had a similar amount, around 620 mmt, to crush this year, but won't do so even though around 15 mmt to 20 mmt will likely be crushed in the off season, between November and March, said Fabio Meneghin, cane analyst at Agroconsult, told a conference call.
After years in the doldrums, the economic outlook improved for sugar and ethanol mills in 2015 because of several factors: the return of a key federal sales tax on gasoline, which made ethanol more competitive, a hike in the percentage of ethanol in gasoline fuel from 25% to 27% and the introduction of a more favorable differential on state sales tax on ethanol and gasoline in Minas Gerais, a large southeastern state.
These factors pushed ethanol margins higher through the year and sugar margins have now followed suit, due to the 30% devaluation of the Brazilian real this year and the recent run-up in international futures.
Agroconsult estimates margins, before taxes, were at 17% for producing ethanol and sugar in the 2015-16 center-south season, which is just coming to an end.
For the 2016-17 season, sugar margins are on the rise with the consultancy forecast sugar margins at 20% and ethanol margins at 14%.
However, there will not be a significant switch to sugar production. The main reasons are liquidity and reduced need for credit in the middle of the crisis. Also, there are around 100 units that are solely ethanol distilleries and don't have the capacity to produce sugar.
Agroconsult pegs 2016-17 ethanol production at 27.8 to 28.5 billion liters (7.3 to 7.5 billion gallons), up 3.6% to 6.2%, and sugar output at 32.9 mmt to 33.7 mmt, up 2.8% to 5.3%.
With domestic ethanol demand continuing strong, there will be limited amounts of the biofuel available for export.
Alastair Stewart can be reached at firstname.lastname@example.org
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