Sugar futures rebounded from a contract low after Unica heralded a downgrade to its forecast for Brazil Centre South output, following rain delays to the cane harvest and a focus by mills on making ethanol.
Raw sugar futures for October delivery, which hit a contract low of 11.35 cents a pound earlier in the day, recovered to close at 11.51 cents a pound in New York, a gain of 1.1% on the day.
The recovery followed the release by Unica, the Brazilian cane industry group, showing that the cane harvest in the Centre South suffered even more from heavy rains than most investors had expected.
Centre South mills, responsible for some 90% of the country’s sugar output, crushed 29.3m tonnes of cane in the first half of July – down 37% from the volume processed in the last half of June, and a drop of 29% year on year.
Market expectations were for a cane crush 28m-33m tonnes.
“This reduction of processing in the first half of July was due to the heavy rainfall that hit major sugarcane areas in the Centre South, especially those located in the states of Parana, Mato Grosso do Sul and São Paulo,” said Antonio de Padua Rodrigues, Unica’s technical director.
‘Smaller than forecast’
The extent of the decline raised doubts that Centre South mills will in 2015-16 crush the 590m tonnes of cane that Unica has forecast.
“If the rainy weather persists… the difficulty in harvesting and the poor quality of cane may lead to a smaller crop than that originally forecast,” even assuming mills extend their processing season longer than normal, Mr Rodrigues said.
Mills would need to process an extra 35m tonnes of cane over the next two weeks, compared with last year, to catch up with their target pace of processing, he added.
On Wednesday the chief executive of Brazilian sugar and ethanol group Raizen warned that the delay to the harvest could see some cane left in the field until the next cutting year.
Sugar vs ethanol
Sugar output faces the extra setback that mills are turning more cane into ethanol, rather than sweetener, than initially expected.
The proportion of cane turned into sugar so far this season, at 39.9%, is the lowest in seven years, limiting Centre South output of the sweetener to 10.71m tonnes, a decline of 16.9% compared with output as of the same period of 2014-15.
“The current trend of allocation of processed cane suggests that sugar production in 2015-16 should be lower than initially anticipated by [Unica] earlier this year,” Mr Rodrigues said.
Unica in May forecast a drop of 190,000 tonnes to 31.8m tonnes in Centre South sugar output in 2015-16, which started in April.
Mills are being encouraged by low sugar prices to switch output to ethanol where possible.
Hydrous ethanol is used as a road fuel for Brazil’s large fleet of flex-fuelled vehicles, while anhydrous ethanol can be shipped overseas, to be blended in to gasoline and used in conventional vehicles, as well as being blended into gasoline domestically.