Brazil Mills Cancel Sugar Export Contracts, Shift Production to Ethanol – Reuters

By Marcelo Teixeira

Brazilian sugar cane mills are reportedly canceling some sugar export contracts and reallocating production towards ethanol in response to soaring energy prices. This shift has raised concerns about a potential sugar shortage.

A trader from a major international commodities firm mentioned at a recent Sugar Week event in New York that nearly every company involved in sugar trading in Brazil has experienced cancellations, estimating the total at between 200,000 and 400,000 tonnes of raw sugar.

The trader highlighted that these cancellations are influenced by changes in production focus and delays in the current crop. Brazil typically exports around 2.2 million tonnes of sugar monthly during peak harvesting periods, and a significant decline in sugar output could lead to global supply shortages, according to some traders.

Brazilian mills, which are known for their operational flexibility, can adjust production between sugar and ethanol. Currently, many are opting to produce more ethanol, driven by heightened energy prices stemming from economic recovery post-pandemic and ongoing geopolitical tensions.

Analyst forecasts indicate a decrease in expected sugar output alongside an increase in ethanol production, as profit margins for biofuels have improved, with sales rising by 2.6% in April.

Another trader, also representing a major food merchant, confirmed the ongoing cancellations—referred to within the industry as washouts. He mentioned that traders are generally striving for flexibility during negotiations. "Since these contracts typically fall under a take-or-pay structure, the penalties for cancellation can be substantial for mills," he noted.

An executive from one of Brazil’s largest mills, who preferred to remain anonymous, stated that the financial benefits of moving from sugar to ethanol can offset the costs associated with contract cancellations. Brazil holds the position of the world’s second-largest ethanol producer, trailing only the United States.

"Ethanol sales generate quicker payments, often within one or two days, whereas sugar exports involve a much longer process," the executive explained. "Mills have pressing financial obligations as the harvesting season begins."

As of late last week, hydrous ethanol was priced at the equivalent of approximately 20 cents per pound for sugar, compared to sugar futures trading at just above 19 cents per pound.

Last season, Brazilian mills utilized 45% of the sugarcane crop for sugar production and 55% for ethanol. Each percentage point corresponds to about 700,000 tonnes of sugar. According to industry data, the lowest recorded percentage for sugar production was 34.3% in 2019, a low-price year, while the highest was 49.7% in 2006 during a period of elevated prices.