Several years ago, as much as 65% of all cane grown in Brazil was dedicated to ethanol production. As sugar prices exploded towards 30¢ per pound and beyond, profitability shifted towards sugar production. At present only 51% of the crop is being turned into ethanol. That is sure to change.
First, the government is expected to raise the minimum ethanol-to-petroleum ratio from the 20% to 25% range sometime in the new year. More importantly, though, the end of the ethanol-subsidy era in the U.S. and a disastrous U.S. corn crop this past summer have sparked a wave of U.S. imports of Brazilian ethanol.
Several months ago, 2012-13 Brazilian ethanol exports were estimated at 2.2 billion liters, up from 1.9 billion in 2011-12. Roughly 75% of exports are destined for the US, but that ratio is likely to grow. The export estimate is being revised upwards, with some analysts putting the figure at 2.55 billion liters. And there is ample evidence that these estimates are conservative. September exports were 452 million liters, up from 174 million liters a year earlier. In October exports reached 492 millions liters, compared with 247 million liters in October 2011. Expect these developments to tighten up Brazilian ethanol supplies and to accommodate a considerably higher ethanol-to-sugar output ratio.
On Nov. 15 The International Sugar Organization raised its estimate for the 2012-13 global sugar surplus to 6.18 million tonnes, up from a previous forecast of 5.86 million tonnes. While we can’t disagree with this forecast under current conditions, we believe that Brazilian sugar supplies – the single most important fundamental for the global sugar market – will not be as plentiful heading into the coming months.
We’ve struggled with a long position in sugar, which we view as still being a long, drawn out bull market. Maintain the 18.5¢-per-per pound stop, basis the nearest contract, we recommended on Aug. 31.