Sugar may fall another 6 percent in New York this year and prompt millers in Brazil, the world’s largest producer, to make more ethanol from cane at the expense of the sweetener, helping curb the global surplus.
Raw sugar futures traded in New York will drop to 17.66 cents a pound this year, according to the mean of 27 analyst and traders estimates compiled by Bloomberg at the Kingsman sugar conference in Dubai this week. Ethanol production in Brazil’s center south will climb 14 percent in the 2013-14 marketing year that starts there in April, according to Brazil-based Copersucar SA, which produces sugar and ethanol.
Sugar has dropped 4.1 percent this year on top of losses of 39 percent the past two years as global production overwhelmed demand. Brazil’s sales of hydrous ethanol, used in flex fuel cars and made from cane, have dropped for three years in a row because it’s been uncompetitive to gasoline, according to New Energy Finance. The 2012-13 sugar surplus that ends in September will be the third straight surplus, Macquarie Group Ltd. said last month. If prices keep falling this year, it would be the third annual decline and longest slump since 1992.
“If you want to eliminate sucrose, you have to consume it or you either sell it to somebody and he has to want to use it,” said Jonathan Drake, chief operating officer of Singapore- based trader RCMA Commodities Asia Ltd. and former head of sugar at Cargill Inc. “You have to give people confidence that people are using hydrous ethanol again because hydrous ethanol was the product that no one wanted to make, nobody wanted to use, nobody wanted to sell and therefore consumption collapsed.”
Raw sugar for March delivery fell 0.1 percent to 18.72 cents a pound at 1:03 p.m. on ICE Futures U.S. in New York. The 2012-13 surplus is estimated by Singapore trader Olam International Ltd. (OLAM) at about 10 million metric tons. Macquarie puts the surplus for 2013-14 at 3.53 million tons.
Hydrous ethanol sales in Brazil last year dropped to 8.9 billion liters (2.4 billion gallons), the lowest since 2006, according to Roberto Rodriguez Labastida, senior bioenergy analyst at New Energy Finance, owned by Bloomberg LP, in London. Hydrous ethanol costs were too high to be competitive with gasoline at the pump, he said.
Sugar millers in Brazil’s center south, the country’s main growing area, will direct 47.5 percent of this year’s cane crop to make sugar, down from 49 percent last year as demand for ethanol is set to increase, according to Copersucar. Ethanol production will climb to 24 billion liters (6.34 billion gallons) rom 21 billion liters, it said.
Sugar production in Brazil’s center south will climb to a record 35 million to 37 million metric tons in 2013-14, said Mike Gorrell, head of Imperial Sugar Co., a unit of Louis Dreyfus Commodities BV.
Current sugar production estimates in Brazil may change if the government takes more measures to stimulate ethanol demand, which include removing taxes on the biofuel, producers Copersucar, Sao Martinho SA (SMTO3) and Raizen, said in separate interviews in Dubai.
If taxes are removed, the so-called ethanol parity, or the level at which millers favor the biofuel, would climb to 19 cents to 20 cents a pound from 17 cents to 18 cents now, said Paulo Roberto de Souza, chief executive officer at Sao Paulo- based Copersucar.
Petroleo Brasileiro SA (PETR4), Brazil’s state-controlled oil company, said last week it increased gasoline prices at refineries by 6.6 percent last week, helping boost demand for hydrous ethanol. The government also said it will raise the amount of anhydrous ethanol blended into gasoline to 25 percent in May from 20 percent now.
“Who said the current measures are the only ones the government will take,” said Ivan Melo, a commercial director at Raizen. “If the government takes more steps that give the incentive for hydrous ethanol consumption, the shorts will need to start getting worried,” he said. Traders with short positions, or bets on lower sugar prices in New York, outnumbered longs, or bets on higher prices, as of Jan. 29, U.S. government figures show.
In the survey, 16 of the 27 people who said they consider themselves bears gave a mean low for prices this year of 16.58 cents a pound. The two bulls said prices will rise to 20.3 cents a pound while the nine people who said they are neutral gave an average of 19 cents a pound for this year.
Sugar may need to fall to 16 cents a pound for an extended period of time for Brazilian millers to produce ethanol, RCMA’s Drake said. A push to more ethanol output in Brazil could reduce the center south’s sugar output in 2013-14 by 5 million tons to 31 million tons, according to Copersucar. More ethanol could erase the sugar surplus within 18 months, Drake said.
Sugar and ethanol prices need to converge to burn some of the global sugar stockpiles, Imperial Sugar’s Gorrell said. For millers in Brazil to favor ethanol, prices will need to fall to 16 cents or 17 cents a pound, he said.
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