SUGAR is again having the bee-and-honey-pot effect on investors. So I'd like to flag five facts for you about Brazil's new season.
As the world's top producer of sugar and ethanol, Brazil moves and shakes the global market. Though India's own numbers are certainly important, Brazil will be final arbiter of fate. No doubt you have read all the trade forecasts and international S&D balance sheets. But here are a handful of below-the-radar developments that no talking head on telly will tell you.
First, Brazil's cane area is expanding. It has sown 8 mn ha for the 2008-09 season, up 12%. (This is almost double India's acreage this year.) Brazil will also harvest 12% more cane than last year. Even so, Brazil's cane farms add up to just 2% of its total farm land. So they are still not under any assault from food-vs-fuel activists and have plenty of room to grow. Supply of cane is plentiful this year.
Two, mills are growing in number and size. Thirty new mills should start operations this season apart from expansions by older mills. That means increased competitive pressure.
Foreign investment and interest in Brazilian sugar sector has never been higher. Mills controlled by foreign investors crushed 11.5% of all sugarcane crushed in Brazil last year. MNCs now control 10% of Brazil's ethanol production and growing.
The big daddy among foreign investors is the Tereos Group with five plants that crush over 12 mn t cane. They are followed by Louis Dreyfus with seven plants that can crush 11.5 mn t cane. (By the way, the largest cane grower and processor on the planet is Brazil's own Cosan, which crushed 36 mn t last year) All this adds up to great news for consumers but tough love for mills. There is no chance of collusive pricing.
Three, meanwhile all mills are coping with rising cost of growing, harvesting and processing cane. It now costs 11% more to plant cane. The average cost per cut has increased 30% due to the sharp increase in the cost of inputs such as fertilisers.
Last year, in Sao Paulo region, which is the Maharashtra of Brazil's cane sector, producing a tonne of cane cost a mill $19. With average yield of 90t/ha, that means a cost of $1649 per hectare. But due to an explosive increase in cane supply, cane prices fell 32%. So mills earned only $1607 per hectare and incurred a $42 loss. So bottomlines are under pressure.
Four, while ethanol and power are two significant revenue streams, they are no match for sugar. Speaking at Stanford last November, Cosan CFO Paulo Diniz broke down Cosan's $1.7 bn in revenue: 61% from sugar sales, 33% from ethanol sales, and 6% from cogen power sales. That proportion is fairly typical. So don't believe anyone who says Brazilians have gone off sugar.
On the face of it, ethanol is on a bull run within Brazil. Its fleet of flex fuel cars is enlarging rapidly with 23 of every 100 cars now run on pure hydrated ethanol or a flex-fuel blend. So total domestic ethanol consumption this year may cross 22 bn litres, from 19 bn litres last year.
But Brazilians tank up on ethanol only when they get it for less than 70% the price of petrol. In the peak cane crushing months when ethanol is plenty, that is no contest and ethanol wins hands down. With crude at $149/barrel, even in the off-season months ethanol had little to worry. Now petrol could look attractive once again. This has happened quite frequently in the past, especially in the last two months of the Brazilian sugar year (Jan-Feb).
With 58% of 550 mn tonnes cane likely to go straight into ethanol this year, ample supply should keep ethanol cheap and the preferred consumer choice. But if crude drops to around $100, ethanol needs to sell for less than $70. If mills find that unviable, they are quite likely to switch back to sugar. So don't take the ethanol boom for granted.
Meanwhile, returns from cogen are a bit dodgy. Currently, only 48 mills out of 405 sell electricity to the grid and/or other private companies. According to the Sugar and Alcohol Millers Association of Sao Paulo State (UNICA), the current net profit margin from cogen is around 15%.
But it isn't that simple. The cost to connect the mill to the grid is highly expensive and some mills are 1,000 km away. Moreover, the current average price is R$140 per mega watt hour. For the new season, the government is unlikely to pay more than R$149/MWh. That isn't enough to attract investment into larger and more efficient boilers. Basically mills will continue to depend on ethanol and sugar for profits.
Five, Brazil plans to increase ethanol exports 25% to almost 5 billion litres. Of this, over 3 billion litres could potentially be exported to the US, either directly or through the Caribbean Basin Initiative. That sounds like a great profit opportunity. But Brazil's competitiveness in the US after paying a 55 cents-per-gallon import duty depends on local corn prices.
December corn is trading at $5.35 on CBoT. That's a 15% drop in six days, the most since July 1988. At $5 corn, US ethanol costs about $2/gallon. So before betting on enhanced Brazilian exports to US, I'd recommend updating the equation frequently.
Brazil will certainly crush more cane this year. But will it find a profitable market for both sugar and ethanol in an era of rising costs and nail-biting competition is the big question. Ultimately Brazil's collective corporate strategy and vision will impact India and the global market. Make sure the risks they take doesn't become your honey trap.
nidhi.srinivas@timesgroup.com
As the world's top producer of sugar and ethanol, Brazil moves and shakes the global market. Though India's own numbers are certainly important, Brazil will be final arbiter of fate. No doubt you have read all the trade forecasts and international S&D balance sheets. But here are a handful of below-the-radar developments that no talking head on telly will tell you.
First, Brazil's cane area is expanding. It has sown 8 mn ha for the 2008-09 season, up 12%. (This is almost double India's acreage this year.) Brazil will also harvest 12% more cane than last year. Even so, Brazil's cane farms add up to just 2% of its total farm land. So they are still not under any assault from food-vs-fuel activists and have plenty of room to grow. Supply of cane is plentiful this year.
Two, mills are growing in number and size. Thirty new mills should start operations this season apart from expansions by older mills. That means increased competitive pressure.
Foreign investment and interest in Brazilian sugar sector has never been higher. Mills controlled by foreign investors crushed 11.5% of all sugarcane crushed in Brazil last year. MNCs now control 10% of Brazil's ethanol production and growing.
The big daddy among foreign investors is the Tereos Group with five plants that crush over 12 mn t cane. They are followed by Louis Dreyfus with seven plants that can crush 11.5 mn t cane. (By the way, the largest cane grower and processor on the planet is Brazil's own Cosan, which crushed 36 mn t last year) All this adds up to great news for consumers but tough love for mills. There is no chance of collusive pricing.
Three, meanwhile all mills are coping with rising cost of growing, harvesting and processing cane. It now costs 11% more to plant cane. The average cost per cut has increased 30% due to the sharp increase in the cost of inputs such as fertilisers.
Last year, in Sao Paulo region, which is the Maharashtra of Brazil's cane sector, producing a tonne of cane cost a mill $19. With average yield of 90t/ha, that means a cost of $1649 per hectare. But due to an explosive increase in cane supply, cane prices fell 32%. So mills earned only $1607 per hectare and incurred a $42 loss. So bottomlines are under pressure.
Four, while ethanol and power are two significant revenue streams, they are no match for sugar. Speaking at Stanford last November, Cosan CFO Paulo Diniz broke down Cosan's $1.7 bn in revenue: 61% from sugar sales, 33% from ethanol sales, and 6% from cogen power sales. That proportion is fairly typical. So don't believe anyone who says Brazilians have gone off sugar.
On the face of it, ethanol is on a bull run within Brazil. Its fleet of flex fuel cars is enlarging rapidly with 23 of every 100 cars now run on pure hydrated ethanol or a flex-fuel blend. So total domestic ethanol consumption this year may cross 22 bn litres, from 19 bn litres last year.
But Brazilians tank up on ethanol only when they get it for less than 70% the price of petrol. In the peak cane crushing months when ethanol is plenty, that is no contest and ethanol wins hands down. With crude at $149/barrel, even in the off-season months ethanol had little to worry. Now petrol could look attractive once again. This has happened quite frequently in the past, especially in the last two months of the Brazilian sugar year (Jan-Feb).
With 58% of 550 mn tonnes cane likely to go straight into ethanol this year, ample supply should keep ethanol cheap and the preferred consumer choice. But if crude drops to around $100, ethanol needs to sell for less than $70. If mills find that unviable, they are quite likely to switch back to sugar. So don't take the ethanol boom for granted.
Meanwhile, returns from cogen are a bit dodgy. Currently, only 48 mills out of 405 sell electricity to the grid and/or other private companies. According to the Sugar and Alcohol Millers Association of Sao Paulo State (UNICA), the current net profit margin from cogen is around 15%.
But it isn't that simple. The cost to connect the mill to the grid is highly expensive and some mills are 1,000 km away. Moreover, the current average price is R$140 per mega watt hour. For the new season, the government is unlikely to pay more than R$149/MWh. That isn't enough to attract investment into larger and more efficient boilers. Basically mills will continue to depend on ethanol and sugar for profits.
Five, Brazil plans to increase ethanol exports 25% to almost 5 billion litres. Of this, over 3 billion litres could potentially be exported to the US, either directly or through the Caribbean Basin Initiative. That sounds like a great profit opportunity. But Brazil's competitiveness in the US after paying a 55 cents-per-gallon import duty depends on local corn prices.
December corn is trading at $5.35 on CBoT. That's a 15% drop in six days, the most since July 1988. At $5 corn, US ethanol costs about $2/gallon. So before betting on enhanced Brazilian exports to US, I'd recommend updating the equation frequently.
Brazil will certainly crush more cane this year. But will it find a profitable market for both sugar and ethanol in an era of rising costs and nail-biting competition is the big question. Ultimately Brazil's collective corporate strategy and vision will impact India and the global market. Make sure the risks they take doesn't become your honey trap.
nidhi.srinivas@timesgroup.com
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