The “operational flexibility” of Brazilian mills means that sugar production will be unaffected by the disappointing cane crop, Societe Generale said.
Data from the Brazilian cane industry body Unica, released on Friday, showed sugar production lower than expected, at 2.41m tonnes.
But this is still well up from the same time last year, and significantly, the proportion of the cane crop devoted to sugar is at 48.2%, compared to just 40.0% at last year, and more than the market expected.
Societe Generale said the data “highlighted the operational flexibility of the Brazilian mills”.
And the bank forecast mills in the region to increase their sugar capacity by some 1 to 2m tonnes over the next twelve months, increasing their ability to prioritise sugar over ethanol production.
Sugar over ethanol
So despite a downgrade to its estimate of cane production Societe Generale left its forecast for sugar production this season in the Brazilian cane belt unchanged, at 35.4m tonnes.
This compares to the 34.2m tonnes forecast by Datagro, the Brazilian sugar consultancy, back in August.
Societe Generals said that by diverting cane toward sugar production, and away from ethanol, mills can “offset the impact of productivity losses and a lower sucrose content”.
The bank downgraded its forecast for ethanol production to around 26bn litres, down some 2bn litres.
And sugar production will rise next season, despite less cane availability, with cane belt sugar production seen at 36.3m tonnes.
“We expect Brazilian mills to use more cane for sugar production than ethanol due to the higher profitability of sugar and a favourable forward curve on the Brazilian real,”
Bullish price outlook
The bank remains “cautiously bullish on sugar prices”.
Societe Generale forecasts the global sugar deficit, the shortfall of production against supply, at 3.7m tonnes in 2016-17.
This is below the 7.50m tonne deficit forecast by Rabobank last month, and the 6.45m tones forecast by Platts Kingsman.
SocGen downplays Indian sugar imports…
“We believe most of the positive news for sugar is already in the price,” the bank said.
The two potential positive fundamental development for prices would be significant Indian sugar imports, or weather worries for the 2017-18 cane harvest.
India is the world’s biggest sugar consumer, and prices are above international levels, but the region is currently closed to exports, due to tariffs.
The bank stated that due to “higher inventories, India is unlikely to increase its sugar imports” unless weather impacts 2017-18 cane crop, which will begin harvest in October next year.
…but others disagree
But other market participants are not so keen to write off Indian sugar imports.
At the Kingsman Sugar Conference in Delhi last week, a trader from Luis Dreyfus forecast 1m tonnes of Indian imports in the 2016-17 marketing year, which has just started.
At the same conference the Indian Sugar Mills Association also flagged the possibility of imports, as Indian production falls short of consumption for the first time in seven years.
(Source – http://www.agrimoney.com/news/sugar-mill-flexibility-will-keep-brazilian-production-rising–9993.html)