The worrying drop in sugarcane productivity

Let's summarize the facts from July. In relation to sugarcane, this reduction in ATR that has been observed, if it persists, is a worrying factor for the end of the harvest. This harvest, until July 15, we have already crushed 258,13 million tons, 4% less than in the same period of the previous year. We are averaging (CTC) 84,87 tons/ha, which is slightly higher than the 82,11 tons/ha of the last harvest. However, the amount of sugar in cane is 4% lower than in the last harvest (ATR per ton is 126,31 kg, and was 131,71 kg in 2018/2019). We do not yet know the effect of frost on the sugarcane field, it should appear in the next UNICA analyses. Worrisome.

For the sector, the payment of compensation comes at a good time with the sugar price fixing carried out in the 80s by the Sugar and Alcohol Institute (IAA). Copersucar has already received it and others are on the same path. These receivables are also being used to raise funds. For a sector with high debt, cash inflow is always a relief.

The big news in June in business terms was the announcement of the joint venture between BP and Bunge, creating BP-Bunge Biocombustíveis, each with 50%. The sugarcane business is small for both companies, less than 2% of their revenues. The agreement involves a payment of US$75 million from BP to Bunge. There are three plants at BP (10 million tons) and eight at Bunge. In total, capacity now exceeds 30 million tons, making it the fourth largest group, just below Biosev (33 million), Atvos (37 million) and Raízen (73 million). This is a very interesting initiative to optimize the use of assets and reduce overheads. If done well, it will be good for the sugarcane sector, despite the volume of jobs that will be lost due to overlapping functions.

In sugar, the Central South Plants managed to reduce production by 11% compared to the previous year, which had already fallen significantly. Until July 15, 10,86 million tons were produced, almost 1,4 million less than in the same period in 2018. In other words, Brazil continues to remove sugar from the market. We can only produce 25 million tons. Datagro has already taken the global projection for 2019/20 to a deficit of 6,42 million tons. But these signals are not reflected in prices due to high inventories and India.

But finally Brazil, Australia and Guatemala asked the WTO (World Trade Organization) for a panel against India's sugar subsidies. Survey presented by Itamaraty for the 2018/19 harvest which showed that additional production from India depressed prices by 25,5% and this resulted in a loss of US$ 1,3 billion in Brazilian exports. It is estimated that the minimum price paid for sugarcane in India stipulated by the government has doubled in seven years, flooding the world market.

The Indian Sugar Mills Association (ISMA) is asking for support to export more than 7 million tons in the next harvest, its damage to the world market is impressive, even with lower production expected, due to weather problems. ISMA expects to produce 28,2 million tons and start the harvest with 14,7 million tons of stocks. Annual consumption is 26 million tons. India should strengthen its ethanol program to maintain producers' income and help by removing sugar from the world market.

In the domestic market, according to CEPEA, prices are almost 20% higher compared to this harvest period and last year.

In relation to ethanol, the good news was that in the last month oil rose again by around 3%. As the mix is ​​at 62% in São Paulo, hydrated consumption has been breaking records and prices are remaining the same with the peak of the harvest. In the first 15 days of July alone, 1,38 billion liters were sold by plants in the Center South, 914 million of which were hydrated.

The EPA (US Environmental Protection Agency) believes that the US will import around 60 million gallons of ethanol from Brazil in 2020, reducing its previous projection of 100 million gallons. We will also have some space in the cellulosic quota, with ethanol made from sugarcane bagasse. It maintained space for corn ethanol and others considered conventional at 15 billion gallons.

At the end of August, the quota of 600 million liters opened by Brazil to import anhydrous ethanol from the USA ends without paying the common external tariff of 20% existing in Mercosur. It is a fact that American ethanol entered the Brazilian market with force. From January to May 2019, 800 million liters have already been imported. Let's see the reactions of the Government and American producers.

A long-term analysis carried out by Professor Adriano Pires showed that last year, Brazil consumed practically 80 million m³ of diesel and gasoline (not counting biodiesel and ethanol), with almost 20% imported. With the recovery of the economy (the relationship between the increase in fuel use and the variation in GDP can be as high as 2 to 1) and the difficulty in expanding domestic supply, greater volumes of imports will be necessary, so we must invest already in industrial and movement capacities.

The average value received for ethanol in this harvest reaches almost 10% above the last harvest, added to a sales volume more than 20% higher, which is what has been helping at this time of the sugar crisis. At the time of closing this analysis, by SCA, hydrated ethanol with taxes was at R$ 2,12/l and anhydrous at R$ 2,02/l and sugar negotiated in the October contract at 12,12 cents/pound weight. Ethanol is our ballast.

What would be my strategy based on the facts? What to watch now in August: once again, hope that oil prices remain at a level that allows for an explosion in hydrous sales with a margin for the plants (this month it fell by almost 5%). This is what we have left at the moment to save the value of the ATR, remembering that with the progress of the carriage and the quality of the sugarcane so far, we may have significant frustration in the expected productions of sugar and ethanol.

Marcos Fava Neves is a Full Professor (part-time) at the Schools of Administration at USP in Ribeirão Preto and FGV in São Paulo, a specialist in strategic planning for agribusiness.