Nearly one-third of Brazil sugar mills in financial trouble

The head of Brazil's largest cane co-operative issued a reminder of the financing difficulties facing the sugar industry in the world's top producing country, warning that one-third of mills are at risk of insolvency, or even closure.

Amaldo Bortoletto, the president of Coplacana, whose members account for nearly half Brazil's 8.2m hectares of cane production, said that prospects for the sector were "rather awesome".

"We know that Brazil has to grow [in sugar] and will grow," he told an industry meeting.

However, expansion required overcoming the challenge of finding funding for operations still suffering from an overhang of debts run up in an expansion spree which left them poorly positioned when the global financial crisis hit.

While many mills have found relief in takeovers by foreign group, such as Bunge, Louis Dreyfus or Noble, which are expanding in Brazilian cane, independent mills were continuing to struggle to find funding for existing operations, let alone expansion.

'Some may even close their doors'

Of the more than 400 mills with which Brazil entered the financial crisis "today some 30% of them suffer from insolvency or bankruptcy and some may even close their doors", Mr Bortoletto said.

The sector's difficulties were being exacerbated by overcapacity, with the expansion drive, which drove mill numbers to 432 in 2010, with a handful of openings since, creating cane crushing capacity of some 700m tonnes a year.

However, the cane harvest is only expected to come in well below 600m tonnes, including the crush in both the main Centre South region, pegged by many analysts at roughly 510m tonnes, and the North East, which is expected to process some 65m tonnes.

'Financial situation getting worse'

The caution is the latest in a series over the financial state of the Brazilian sugar industry, now facing a period of low sugar prices, which closed on Wednesday within $0.20 a pound of a two-year low on New York's Ice futures market.

Macquarie in June said, after a field trip to Brazil, that "the biggest takeaway from our visit to Brazil's sugar heartland was that the financial situation of most mills was getting worse, not better," despite three years of very attractive high prices".

"Over-expansion in the years preceding 2008 and the subsequent credit crisis has left mills struggling to pay off debts.

"Rising costs of production since then - wage and land inflation, cane costs and rising borrowing costs - have hit margins, whilst yield losses stemming from adjustment towards mechanisation and adverse weather have hit production volumes."

Debt burden

According to sugar merchant Czarnikow, the expansion drive between 2005 and 2009 saw industry debt levels soar from R$8bn to R$42bn in Brazil, "the equivalent of an increase from R$25 per tonne crushed in 2005 to R$75-80 per tonne crushed in 2009".

"The more-leveraged groups reached indebtedness levels as high as R$100-120 per tonne crushed - debt levels greater than a full year of net revenues."

However, crop scout Michael Cordonnier, who has close ties with Brazil, said while the short term prospects for Brazil's sugar industry were "not encouraging, the long term view is more optimistic", given the potential for ethanol based on the sweetener to support cane production.

"Over 90% of new cars in Brazil are flex fuel," able to operate on gasoline or ethanol.

"So the demand for ethanol will continue expanding if the price of the fuel can be kept below 70% of the price of gasoline," he said.