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Brazil drought may be bigger sugar threat in 2015

Cane industry group Unica pointed to damage this year to Brazil cane from drought, but producer Sao Martinho said that mills may feel the impact may more next year, after using up a "buffer" of unharvested cane.

Unica, the cane industry group, undermined industry expectations of a rise in the 2014-15 cane harvest, which starts in April, in Brazil's Centre South region thanks to the six-week dry spell which began in late December.

The drought, which affected the key coffee producing state of Minas Gerais besides the major sugar producing state of Sao Paulo, has likely damaged 35m-40m tonnes of cane, Unica said meaning the crop will be no larger than that 596m tonnes harvested this season.

"The expectation is that now rains will be normal and there won't be any more damage than what already occurred," said Antonio de Padua Rodrigues, the Unica technical director.

But "what was last was lost" in the Centre South, which produces some 90% of Brazil's sugar.

'Carried over cane'

The comments follow an idea from Sao Martinho, one of Brazil's largest ethanol and sugar producers, that the impact of the drought on volumes of cane harvested might actually be bigger in 2015 than this year.

The 2014 crop will be bolstered by cane left unharvested last year, thanks to a strong crop, and some interruptions to fieldwork from rain.

Sao Martinho had finished with about 1.4m tonnes of cane left unharvested which gave the group "a buffer" against any damage to the crop.

For 2014-15, the group had industrial capacity, and 16.5m tonnes of cane to crush "even if the drought lasts as long as the end of February", Mr Vicchiato told investors.

"Other companies also had good yields, and they are probably carrying over their cane as well.

"So, this year, we think that there should be more sugarcane because we still have the carried over cane."

'Very rare event'

As an extra boost to the 2014 result, it was likely that the Centre South would not, as last year, suffer a frost which damaged some cane.

"This was a very rare event that should not be repeated this year," he said.

Furthermore, "last year we had a lot rain fall in the midst of the crop season. And if we do not have the same rain this year, the [sugar levels in cane] should improve".

"All in all, we are considering that this crop will be pretty much in keeping with that of last year in terms of the end product."

'Problems with replanting'

It could be next year which sees a bigger effect, with companies potentially lacking the buffer of carryover cane, and finding new crop cane sowings damage.

The concern for Sao Martinho was that it would "not have enough cane for the crop year of 2015-16," Mr Vicchiato said.

The comments tally with concerns raised by observers such as Marex Spectron, the London broker, which on Monday restated caution over recently-planted cane, which would typically not be harvested until at least mid-2015.

 "There have certainly been problems with replanting," Marex said.

"Some [cane] failed to germinate or germinated and then died, while a lot of time for re-planting was simply lost because the ground was too dry to plant at all in January."

However, it added that with the Centre South as big as Western Europe, there was some danger in making generalisations, as "variations across the territory are huge".

'Not sufficient'

The comments come as some rain has returned to the Centre South, although "most forecasters think that the rains foreseen for the coming 10 days will not be sufficient", Marex said.

In fact, nearly 6 million people were now affected by water shortages, with some neighbourhoods only receiving waters once every three days, according to the Folha de Sao Paulo newspaper.

Water levels in the largest reservoir serving Sao Paulo city have fallen below 19% of the water capacity of 1,000bn litres (264bn gallons), with reports of some alarm, , if rains are not forthcoming, at the prospect of hosting the soccer World Cup later this year.

Hedged ahead

Mr Vicchiato's comments followed Sao Martinho's release of results showing a quadrupling in earnings for the October-to-December quarter to R$32.96m, reflecting reduced depreciation charge and the impact of the weaker dollar in boosting the value of its dollar cash balance.

Underlying earnings before interest, tax, depreciation and amortisation (ebitda) rose 4.6% to R$168.4m, on revenues up 6.7% at R$444.4m, reflecting higher yields and a larger area of cane under management.

The group signalled caution over ideas of sugar price rises by revealing that it had sold ahead 338,536 tonnes ahead at 18.34 cents a pound.

This represented 44% of internal expectations for 2014-15 sugar output - "total sugar production" outside volumes sold through the Consecana council.

However, BancoFator estimated that it represented only 33% of Sao Martinho's likely sugar output next season.

Raw sugar futures for 2014-15 are valued at 15.99 cents a pound for New York's May contract to 17.45 cents a pound for the March 2015 lot.

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