ANALYSIS-Brazil mills prefer sugar despite biofuel boost

Published: 11 Jun 2009 04:30:55 PST

* Cosan sees higher sugar share in cane crush

* Higher oil price boosts interest in biofuels

* Strong Brazil currency erodes ethanol export income

SAO PAULO/LONDON, June 11 - Brazilian mills are ramping up sugar output at the expense of ethanol, and sugar will likely remain more remunerative this season due to strong demand despite prospects for rising biofuel prices.

Earlier this month, Brazil's Cosan, a leading sugar producer, said higher sugar prices could lead it to increase the sugar share of its 2009/10 sugarcane crush to 55 percent. Brazil is the world's leading sugar producer and exporter.

This compares with 50 percent of the cane crop the company expected earlier this year to use for sugar and an average of 42 percent in the sector.

"There is such a difference at the moment between the price of ethanol and the price of sugar that millers will do everything possible to maximise sugar production," said Jonathan Kingsman, managing director of Lausanne-based sugar and ethanol consultancy Kingsman SA.

"Ethanol prices are rising but they will have to go much higher to win back sucrose from sugar," Kingsman added.

Presently, ethanol prices are equivalent to a sugar price of around 9 cents per lb, far short of the actual raw sugar market price at 15-16 cents per lb.

Analysts said that the 40 percent surge of raw sugar prices on the international market this year represented a huge incentive for Brazilian mills, hard hit by the global financial crisis, to allocate more cane to sugar rather than ethanol.

A strong appetite for sugar from South Asia, notably India, after poor local crops, has pushed sugar prices sharply higher.

Sugar cane-based ethanol fuel is expected to take over 75 percent of Brazil's light vehicle fuel market, shrinking petrol's stake to 17 percent by 2020, the head of state-run oil company Petrobras, Jose Sergio Gabrielli, said earlier this month.

Antonio de Padua Rodrigues, technical director at Brazil's Sugar Cane Industry Association (Unica), said, "Sugar has been a priority. The actual (sugar-ethanol) mix will result from cane quality. If the winter is colder and drier than last year, cane quality will likely improve and we'll see more sugar produced."

Unica expects 2009/10 sugar production in the main centre-south growing region of Brazil to rise to 31.2 million tonnes, up 4.5 million tonnes from last season.

Analysts say that ethanol prices, which are currently below production costs, should recover in the second half of 2009 as as cane harvest pressure wanes and ethanol supplies tighten.

A senior U.S.-based analyst, who asked not to be identified, said, "The early Unica crush data confirms that the mills in the centre-south region have made an early and aggressive move in their mixes towards sugar."

The analyst said the centre-south mix was on course to stand at 43 percent sugar and 57 percent ethanol. That compares with 39.4 percent of the mix used for sugar in the region last year.

RISING OIL PRICES

The recent rise in oil prices to above $70 a barrel could boost international demand for biofuel alternatives such as ethanol.

But ethanol was unlikely to get a boost because there was no indication that Brazilian authorities would change the price of petrol at the pump. And the recent surge of the Brazilian real currency against the dollar deflated ethanol export prospects.

"Brazil's currency has strengthened around 25 percent against the dollar since March," said Mighel Biegai, sugar analyst at Safras e Mercado consultancy in Brazil.

A stronger real reduces producers' and exporters' earnings when they are converted into local currency.

"Oil would have to rise further to stimulate an increase in ethanol exports," he added.

Unica's Padua Rodrigues said the rise in ethanol prices was unlikely to make ethanol more remunerative than sugar for Brazilian millers.

"Ethanol prices are currently at 0.58 real per litre. Even if they rise to 0.80 real per litre, this is equivalent to sugar at 12 cents per lb. Sugar is currently at 15-16 cents," he said.

"So the gap between sugar and ethanol could shrink but it is unlikely to disappear this season."