Brazilian sugarcane producers are expected to keep favoring sugar production over ethanol in the 2023-24 Center-South crop that is expected to start in mid-March 2023, 15 days earlier than usual as wet weather in 2022 kept producers from crushing all the sugarcane available.
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In contrast to the severe dry weather that lowered sugarcane crushing in the 2021-22 CS crop that ended in April, the high volumes of rains in the main producing states in 2022 increased the total volume of cane but negatively affected crushing.
S&P Global Commodity Insights estimated that sugarcane crushing will increase for the second consecutive season to total 586 million tons in the 2023-24 crop, up 35.84 million tons from 2022-23 but still under the latest high of 605 million tons recorded with the 2020-21 crop.
"Assuming favorable weather until March, which is the most important cane growing period, cane agricultural yield is expected to increase to 78 tons/hectare in 2023-24, up 6.5% on the year," said Luciana Torrezan, global manager of sugar analytics from S&P Global Commodity Insights. "Cane availability is expected to grow to 586 million mt, up 36 million mt on the year."
Reasons to maximize sugar production
Considering the sugar mix, producers are expected to keep maximizing sugar production, in line with trends since 2020-21 as the national fuel price environment became cloudy and the Renovabio program did not guarantee enough predictability to encourage an increase in ethanol production.
This same production pattern has been observed since the 2020-21 crop, when sugar in the export market paid an average premium of $55.60/mt over hydrous ethanol in the domestic market. The premium declined in 2021-22 to $17.83/mt but increased again in 2022-23 to an average of $52/mt April 1-Dec. 19.
That wide price spread between the sugar export market and domestic hydrous ethanol is expected to fall if the reinstatement of the Pis and Cofins federal taxes occurs Jan. 1.
"Although the likely reinstatement of federal fuel taxes in January 2023 is a supportive factor for ethanol prices, CS Brazil mills are expected to maintain maximum sugar production in 2023-24," Torrezan said. "Sugar prices are projected to remain more profitable than ethanol in CS Brazil, with Brent crude oil trading below $90/barrel and assuming Petrobras will track international gasoline parity."
2023 production strategy
Unlike the prior two global crop cycles, the current one, which started in October 2022, points to a surplus in the global sugar season (October-September) that could reduce the appetite to produce sugar. However, the combination of international oil prices trending down, an unstable fuel price policy and the absence of ethanol hedging tools can be considered the main considerations for Brazilian producers while forming their production strategy for 2023.
With an estimated larger volume of cane to be crushed in the 2023-24 CS crop and the sugar mix increasing from 45.6% to 46.5%, sugar production is estimated to total 36.12 million tons, up 7.89% year on year.
After two consecutive years of a global sugar balance in deficit, S&P Global Commodity Insights estimates a surplus for the global crop 2022-23 at 3.7 million mt, up from a deficit of 1.2 million mt in the prior global crop.
"When the next CS Brazil crop picks up pace, a growing surplus projected in the global trade flows might pressure NY#11 [futures] prices towards ethanol parity in Brazil," Torrezan said. "In a global surplus scenario, sugar prices might not trade at a material premium to ethanol in Brazil. The sugar premium might narrow from 480 points nowadays to nearly 200-250 points in the peak of the Brazil harvest."