Brazil is one of only a few countries that produces ethanol from sugarcane

Brazil is one of only a few countries that produces ethanol from sugarcane

Earlier this month, the Food and Agriculture Organisation (FAO) revealed a 14% rise in the sugar price index from May to June. Seen as a reaction from the market to a predicted shortage in Brazil, an FAO analyst has questioned the immediate and mid-term growth prospects for Brazil's sugarcane industry.

Brazil is the world's largest sugar producer and, therefore, has considerable influence over the international sugar market. It is understandable, then, that any predicted short-term deficit would lead to soaring prices.

FAO analyst  Elmamoun Amrouk believes that there are a number of factors contributing to the forecast shortage.

"The port infrastructure in Brazil needs to be expanded so there are a lot of boats waiting to be loaded with sugar," Amrouk told just-drinks last week. "That creates some short-term disturbances as far as supply is concerned. So, there is obviously a need for an increase in capacity in Brazil. Then, there is the decline in the overall production of sugar for this year."

He added: "The other uncertainty is the price of crude oil. If we see higher crude oil prices, that will mean reduced sugar output, because Brazil uses over half of its sugar cane to produce ethanol. So, if oil prices go up, a lot of that cane is diverted to ethanol instead of sugar and that creates additional shortages to the market."

Indeed, Brazil is one of only a few countries that produces ethanol from sugarcane, so the balance between ethanol and sugar production in the country immediately affects international sugar prices.

But, while the industry itself can continue to grow, a question mark remains over what, if anything, Brazil can do to offset any future shortages, which will inevitably be picked up by other sugar-producing regions such as Thailand, Russia and Europe.

"Hopefully the weather will improve next year as far as Brazil is concerned, but don't forget that other countries are expected to harvest large amounts of sugar," Amrouk said. "The main constraining factors as far as sugar is concerned is that the situation is very different to the 1990s, when Brazil made a large expenditure in production capacity."

According to Commodity Online, the volume of sugarcane produced and processed by the Brazilian cane industry in the last six years has risen by 60%.

However, it seems the wave of investment in milling capacity that drove this expansion in volume is coming to an end.

"Over the past few years," Amrouk continued, "with the financial crisis, Brazil is now facing higher input costs, so building new mill capacity is expensive because the financing is very high, and input costs are high ... so we won't be seeing any great expansion like we saw in the 90s."

Only five new mills are expected to start operating in 2011/2012, according to Commodity Online, and fewer, if any, are likely to be commissioned in the following season.

But, aside from the high cost of any potential project, sugarcane producers have to deal with interference from the Brazilian Government, which last month declared its intention to increase its intervention in the domestic ethanol market. The Government vowed to work more closely with the private sector in order to boost production.

"They have all these challenges in the Brazilian sugar industry, so I would be really surprised if the growth in the sugar industry and in Brazil over the next ten years matches the growth that we have seen over the past decade," Amrouk said. "That is not going to happen."

While the global sugar industry still has the potential to grow, there is a risk that Brazil's production of sugar and ethanol might struggle to match that demand. This, in turn, raises questions about the implications for the world sugar market, given Brazil's dominant position.