Brazil’s sugar cane industry’s poorest year in a decade gets worse due to strike

29 May 2018 5 min. read

Sugar production in the Central-Southern sugar belt in Brazil was predicted to be substantially lower than average earlier this month and an ongoing truck strike in the country is worsening the impact on mills. As a result Brazil will have the lowest sugar yield since 2009 for this coming 2018/19 season.  

Brazil’s sugar cane industry has been hit by a triple whammy and the result will be a lacklustre season for the world’s largest sugar exporter. The combination of rising global supply driving down sugar prices, a drought in the Central-Southern region, and the strike will have dire consequences for the industry.

Oversupply from sugar producing rivals India and Thailand are having a negative effect on raw sugar prices globally. Sugar prices have become so low that according to experts, 90% of producers worldwide say that they are lower than production costs. 

India is pegged to become the world’s largest producer, taking over from Brazil, whose market share is likely to drop from 52% to 35% if earlier predictions become a reality. The slump in production is likely due to two main issues; bad conditions and cheap prices leading producers to focus on ethanol production instead.

The country’s Central-Southern region has been hit by droughts which have impacted yields earlier in the year. The dry weather will affect the country’s ability to crush the cane but may have a positive effect on yields. The expected result is a drop in exports of 6 million tons of sugar at previous conservative estimates, while the real number may be closer to 8 million tons. 

INTL FCStone, an analyst and consultancy firm, have been monitoring the situation and have predicted that this season will see a 14% drop in sugar production compared to last year. The firm is a Fortune 500 company which is based in New York and has 13 offices in Latin America, including eight in Brazil. 

Brazil, the world’s largest sugar exporter slumps in production

João Paulo Botelho, FC Stone’s Market Intelligence analyst, said in relation to the production downturn, “Forecasts for the next few months show that La Niña - a weather phenomenon caused by cooler temperatures in the Equatorial Pacific Ocean - observed in the first quarter of the year should make weather drier and colder than the historical average.” 

The FC Stone analysis suggests Brazilian producers would look to make ethanol rather than sugar from the cane due to the better returns in that space. “At the peak of the last intercrop period ethanol paid up to 33.4% more than sugar considering the weighted average for each of the two products,” Botelho said. “Although this difference fell to an average of 11.9% in April, ethanol’s advantage over sugar is still the highest of our historical series for the first month of the crop.”

The combination of these situations leaves the country’s sugar industry in an unfavourable position, although production can still grow in the coming months. According to Botelho, while the season is still in its infancy, “mills can recover these losses totally or partially in the coming months”. 

“On the other hand, if the delay in milling is higher than expected or the weather is adverse, it is possible that the lag in the milling persists and leads to the late end of the harvest in some of the producing units, which could lead to losses in the milling. Total Recoverable Sugar and, consequently, the total sugar and ethanol production of the season,” Botelho continued.

Road blockade and trucker strike in São Paulo

Unfortunately, however, there has been an unforeseen situation that is not only delaying mills but actively forcing them to close. Sugarcane mills and sugar suppliers have ground to a halt due to strikes throughout the state of São Paulo in response to the high price of fuel.  

The strike has led to a road blockade which if continued will costs businesses an estimated $48 million each day. As a result, as of the 28th of May, 220 sugar mills had halted. FC Stone however believes that number could jump to as high as 330 by the 30th of May if the strikes continue. 

Brazil’s second largest sugar producer Biosev has suspended operations at two of its cane mills, and others will run out of fuel in the next two days. There has been widespread chaos throughout the state of São Paulo with gas stations and airports running out of fuel and both supermarkets and hospitals’ supplies running dry.

The halt of production and the impossibility of distribution has created a situation where the crushing of a further 10 million tons will be wiped off this years total yield in the second half of May alone, according to the consultancy. 

Bruno Lima, head of INTL FC Stone's Sugar & Ethanol Group in Campinas, said that Brazil "is definitely doing our part to help [drive down] sugar prices," referring to putting a strain on the global supply of the product.

FC Stone's Sugar & Ethanol Group are a team of consultants in the Brazilian sugar and ethanol sector. The firm provides comprehensive advice in strategic commercial planning, risk management, market intelligence and price discovery through a variety of hedging tools using exchange traded products, OTC exotic structures and foreign exchange venues.