It is reported by Bloomberg.

That’s the assessment of Alvean, the world’s largest sugar trader and a joint venture between U.S. agribusiness giant Cargill Inc. and Brazilian producer Copersucar SA. With ethanol prices beating sugar, millers in Brazil’s main producing region will use 33,5% of this year’s crop to make the sweetener, the least on record, said Chief Executive Officer Paulo Roberto de Souza.

Just in the first month of the 2019/2020 harvest that started in April, sugar output was almost 1 million tonnes behind a year earlier, when the Center-South produced record amounts of ethanol for the season, data from industry group Unica show. 

«Only in this early stage of the harvest, we are already 1 million tonnes behind, — de Souza said, — This trend of making more ethanol will continue until the end of the year».

An added factor to the picture is a bout of wet weather that’s hurt the sucrose content for this year’s cane crop. That will also push millers to make more ethanol, he said.

«It’s raining, and therefore, the sucrose content doesn’t take off, — he said — Millers will continue to maximize ethanol until sucrose levels increase and if they don’t, there will be very little sugar». Center-South millers will produce 25 million tonnes of sugar in the current season, he estimates.

Alvean forecasts Center-South millers will crush 575 million tonnes of cane, producing 25 million tonnes of sugar. That’s even less than last year, when most of the industry believed Brazil had reached its maximum ethanol output potential. Improvements to ethanol capacity would still allow for sugar production to drop another 1 million tonnes, he said.

Bumper crops from India to Thailand have left the global sugar market oversupplied, pressuring futures. At the same time, higher oil prices and a weaker Brazilian real have helped make ethanol more competitive than gasoline for Brazilian drivers, most of whom can fill their tanks with one or the other. Alvean’s forecasts assume Brent crude oil at $70 a barrel and that the real won’t break the $4 barrier.

«What could go against this scenario? The real, — de Souza said, — If the real depreciates strongly, this will impact New York prices. And oil, if for any reason oil drops in this period. These two things have a very strong correlation with sugar prices».

Less sugar in Brazil’s Center-South will help push the global market into a shortage of 7 million tonnes in 2019/2020, the trader forecasts. That follows a surplus of 3 million tonnes this season and a giant overhang of 17 million tonnes a year earlier. Still, a large part of the global stockpile is in India, where government support is needed for exports to flow.

India needs sugar prices at 13,45 cents a pound to be able to export with current subsidies in place and at 20,45 cents without government support, according to Alvean. That compares with current prices below 12 cents. Incentives are currently in place through September, and it’s still uncertain if they will be renewed after that.

«Even if the subsidy is renewed, if prices don’t hit that minimum, sugar won’t come out of India because domestic prices are firm, — he said, — Unlike Brazilian and European producers that are bleeding, Indian producers are OK. Why? Because the domestic price is at an adequate level».

The global stocks-to-use ratio, a measure of reserves relative to consumption, is around 45%, according to Alvean. But if inventory that won’t come out is discounted, that number drops to 35%, a level reached in 2011, when prices recovered sharply, de Souza said.

Sugar prices will probably trade in a range of 12 cents to 14 cents in the short term and could eventually break that, he said. That’s if India’s subsidy is renewed.

«If it’s not renewed, it could be explosive for prices», — he said.