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This season, the Brazilian sugarcane crop is nine per cent lower than the government estimate, provoking an observer to say "you are looking at reduced crop at reduced prices. That's a recipe for disaster".
The crop was hit, as Brazil's principal cane region, the centre-south, faced a severe drought during the key growing period. Low returns from the crop will have long-term implications for the sugar mill sector and ethanol production.
With their income reduced, Brazilian growers are reportedly taking less care of their cane fields. Unlike in India, where sugar factories get entire supplies of cane from independent farmers in captive zones, cane processors in Brazil, the world's largest producer of sugar (accounting for 40 per cent of global exports), are also major cane growers. Nevertheless, many Brazilian factories are partly dependent on cane supplies from independent growers.
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The viability of this sector in Brazil is critically dependent on the volume of exports and the prices sugar fetches in the global market. No wonder Brazilian producers are always looking for opportunities to push their sugar, wherever possible. For instance, in recent times, nearly the entire imports by India were from Brazil. Now, Thailand, the world's second-largest sugar exporter, fears once the Asean (Association of Southeast Asian Nations) Economic Community, or AEC, integration happens late next year, allowing duty-free movement of goods and services among the 10 member nations, its sugar sector will be hit. "You may ask why Thailand should feel threatened, as all other Asean members are sugar-importing countries. Thai sugar producers have started voicing concern post AEC integration, Brazilian sugar will find its way into Thailand from its neighbouring countries such as Cambodia, Laos and Malaysia," says former Indian Sugar Mills Association president Om Prakash Dhanuka.
That low global sugar prices aren't allowing production-cost recovery is forcing the beleaguered Brazilian sugar sector to be trimmed. According to Brazilian sugarcane sector organisation UNICA, 44 factories have hut operations since 2009. Commenting on the fallout of the ill-fated expansion of the past, Wall Street Journal says global sugar surplus has forced Brazilian "processors to shut dozens of mills and some growers to invest less in their fields. The moves highlight the desperate economics of the Brazilian sugar sector". The crisis has important connotations for Indian sugar groups, primarily because they remain hugely burdened with stocks of, amid a depressed market.
"We have our back to the wall. At current prices of sugar, factories in Uttar Pradesh aren't recovering cane-procurement cost. No wonder in August-end, of the nationwide cane price arrears of Rs 5,500 crore, the share of Uttar Pradesh alone was Rs 4,500 crore. Four consecutive years of good production will leave the sector with opening stocks of 7.5 million tonnes (mt) for the 2014-15 season starting October. The first advance estimate by ISMA (Indian Sugar Mills Association) pegs the coming season's production at 25.5 mt. I shall not be surprised if it climbs to 26 mt on the back of an improvement in sugar recovery from cane," says Dhanuka. The revised customs duty of 25 per cent is, no doubt, a deterrent to imports. But some officials in the sector will be more comfortable with a duty of 40 per cent. Also, they will be happy if raw sugar imported for refining and re-export doesn't stay here for too long.
Besides making imports unviable, ISMA is justified in asking the government to create a buffer stock of three mt, freeing factories of the burden of financing this inventory. ISMA president Ajit Shriram wonders about the opportune time of dismantling the proposed buffer, as he doesn't foresee "a down cycle in sugarcane and sugar production in the near term". Casting all reservations aside, a buffer at this stage will provide some relief to cane processors. A sure way of reducing production in 2014-15 without causing any hurt to growers will be to use surplus cane juice (the 'B' variety heavy molasses) into ethanol. For this, the government will have to prevail upon oil marketing companies to pay more for this variety of ethanol. Shriram says to make ethanol from heavy molasses, factories have to be paid at least "1.6 times the price of sugar. This is because one tonne of sugar sacrificed will provide about 600 litres of ethanol".
