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

29 May 2018 Consultancy.lat

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.

Going modern with Latin American consumer practices

14 January 2019 Consultancy.lat

In Latin America, corner stores, bodegas, and mom-and-pop shops reign. In the early 2000s, this was not the future idealized by consumer product companies, which aimed to lay the foundation for a fluid network of modern convenience and self-service stores. Distribution channels were planned, and a consumer base targeted: the rising middle class, which was fast becoming more affluent and empowered.

But old habits die hard – and the global market crashed. Thus, the Latin American consumer product market remains fragmented – there are hundreds of thousands of shops scattered around the region – with no intuitive entry point for industry newcomers. Those established companies that had hoped for a more modern future are now struggling, as a large percentage of the market remains unmoved, and the middle class is not rising as quickly as companies had hoped.

This puts consumer product companies between a rock and a hard place. They cannot ignore the traditional habits of the current consumer. To do so would be assured financial loss. But they also cannot afford the potential decade, as well as resources, financial and otherwise, necessary to construct a network that would adequately service an entire region.

But all is not lost. An EY-Parthenon study shows that there are methods and strategies that can allow consumer product companies to infiltrate the Latin American market, with “modest exposure and capital expenditure.” First, however, it is necessary to look at the root causes of the trouble.

Split of traditional vs. modern trade in the food and beverage category in Latin America

Consumer culture shock

When looking toward the future, consumer product companies underestimated the allure of modern convenience stores. “This vision, inspired by North America and Europe, was based on an assumption that consumers would discover modern stores and be delighted by their lower price points, curated, assortments, on-shelf execution, and ‘one-stop-shopping,’ therefore causing a fundamental shift in consumer preference toward a more contemporary shopping experience.”

But societal differences, especially in consumer habits, between Latin America and the aforementioned regions are rather large. Rather than capturing the growing and increasingly affluent middle class, the more modern consumer product stores – the “one-stop-shops” – have faltered. Additionally, in a region where many are paid daily, in cash, the idea of consolidated shopping trips encouraged by modern stores, necessitating higher, if less frequent, lump payments, is undesirable. Modern stores, as well, were often too small to remain in the black, meaning more stores were needed, resulting in a 360-degree turn to the fragmented network that had initially been an obstacle.

Longer working hours among Latin Americans, compared to Americans and Europeans, also means there is less time to shop. Store location is a hugely important factor in a Latin American’s choice of where to shop, with 44% considering it to be the “most influential reason.” Also important is a cultural factor: 60% of Latino consumers have developed a personal relationship with their shopkeeper, “presumably allowing him or her to influence their path to purchase with helpful, time-saving recommendations.”

Markets matter

Modern trade, according to the report, has a “formidable presence” in Latin America, but its growth has stagnated. While modern trade dominates in the home care (68% in 2016) and beauty and personal care (89% in 2016 markets, where products are primarily purchased at large supermarkets or hypermarkets, traditional trade narrowly takes the edge in food (51%) and beverage (50%).

Split of traditional vs. modern trade in the home care & beauty and personal beauty category in Latin America

Different Latin American countries exhibit varying attitudes and openness toward accepting modern trade methods. In Mexico, Argentina, Colombia, and Peru, traditional trade takes a 30% share of all markets. In Chile, for example, this share plummets to 14%. Different national markets also forecast varying degrees of growth – Colombia expects modern trade to grow just over 6.0% annually, while Peru expects 3.5% growth. Consumer product companies would do well, then, to closely examine the country, rather than the Latin American region as a whole, when attempting market entrance.

Market penetration is also not as difficult as in the recent past, thanks to independent distributors that allow companies access to a “reliable network of third-party providers.” This means consumer products companies need not focus or invest in assets and infrastructure, freeing up time and resources to “more value-adding” activities, such as merchandising.

Go mobile

Latin America is the fourth-largest mobile market in the world. Adoption of social media has surpassed that of the Untied States, meaning advertising and marketing budgets can be adapted accordingly, by using “targeted direct marketing campaigns to drive traffic to traditional stores where consumers can discover localized product innovations and assortments.” Regional sales for Proctor & Gamble, for example, have grown 8% in the last fiscal year, with approximately half of its products sold in traditional stores.

Partner up

There are many hurdles to properly handling business with traditional stores, often involving the different distributors for different products in different regions, as well as a lack of talent. To reduce the juggling act, this means distribution partnerships are all but necessary. Consumer products companies must be adaptive and creative to maintain partnerships and retain qualified and experienced professionals.

EY-Parthenon RTM circle

In its study, and to aid those companies looking to dip into the Latin American market, EY-Parthenon developed a four-stage approach to “route to market” transactions.

  • Evaluate capabilities and compare them to opportunities. Essentially, companies should ask themselves, “Is it worth it?”
  • Assess strategic options against all potential risks.
  • Design with the future in mind. Companies must have a vision for how they will keep their operating model up and running in the weeks, months, and years ahead.
  • Implementation must be supported, in various forms – cutover, stabilization, synergy. There should be no surprises when it comes to enacting a plan.

Related: Growth of billionaires in Latin American stagnates.