• Depreciation of Brazilian real helping reduce costs: Bunge CEO
  • Sugar supplies to fall short of demand this season and next

The Brazilian sugar industry is reaching a turning point as global shortages mean more stable prices at a time the depreciation of the real is reducing costs, according to Bunge Ltd., which owns eight mills in the nation.

Brazil, the world’s largest producer, will need to boost output over the next decade to meet rising demand, Soren Schroder, chief executive officer of the White Plains-based company, said at the Dubai Sugar Conference, a private event for 400 industry leaders. Global supply deficits forecast for this year and the next will result in the stabilization of prices, he said.

Sugar futures traded in New York climbed 5 percent last year, reversing four annual declines. The sweetener was last year’s third-best performer in the Standard & Poor’s index of 24 raw materials. A decline of more than 30 percent in the Brazilian real is boosting earnings for millers selling the commodity in U.S. dollars and reducing costs from a peak in 2011, Schroder said.

“We do believe that the Brazilian sugar cane milling and also ethanol industry is at a turning point, that we hit the bottom,” said Schroder of Bunge, which moves about 6.5 million tons a year in its sugar and bioenergy division. “There’s light at the end of the tunnel.”

Supply Shortfall

Global sugar supplies will fall short of demand by 5 million metric tons in the season started in Oct. 1, according to Bunge. Another 2 million-ton deficit is expected for the following year. Brazil will need to process more cane to meet sugar demand that Bunge expects will rise by 48 million tons in the next decade and domestic ethanol consumption that it sees growing by 40 percent, he said.

Raw sugar futures fell 14 percent this year to 13.14 cents a pound Friday on the ICE Futures U.S. exchange.

A lower real has cut millers’ costs by 8 to 10 cents a pound from 2011’s peak and made Brazil again the lowest-cost producer, Schroder said. A political and economic crisis in Brazil meant the real was last year’s second-worst performer in a basket of 24 emerging-market currencies tracked by Bloomberg.

“The combination of the currency, the combination of improved efficiencies put Brazil back on the map in a very solid way,” he said.

Debt Burden

Even so, a cheaper real means millers’ debt has “gone through the roof” as more than 50 percent of the borrowings are priced in U.S. dollars, Schroder said. He cited a March 2015 survey of 65 groups in the center south, Brazil’s largest sugar-producing area, showing that net debt had increased 23 percent year-on-year.

Several years of lower prices and financial struggles mean 47 mills closed in the past three to four years, curbing processing capacity, he said. Mills’ balance sheets are “super stretched,” he said. While the global market will need Brazil to meet demand, the nation probably won’t be able to attract investment to boost cane processing capacity fast enough, Schroder said.

Brazil’s sugar industry will need more stable prices to attract investments. Prices need to be between 14 cents and 16 cents a pound to create an incentive for existing mills to expand, and higher than that to encourage new projects, Schroder said. He declined to comment on whether Bunge still planned to sell its assets in the nation.

While a lower real has given Brazilian millers “a little bit of a break,” there are still opportunities to improve efficiency in the nation, according to Bunge.

“Politics in Brazil at the moment are very complicated, but one day they will be sorted out,” he said. “How do we compete then? That’s what we have to think. We have to think of a way to ensure long-term viability.”

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