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Dryness speeding Brazil sugar output 'poses threat' to volumes ahead

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Industry officials cautioned over a slowdown in Brazil's cane harvest ahead, even as they unveiled another spell of above-forecast sugar output in the Centre South, depressing sugar prices.

Cane industry group Unica pegged sugar production in the Centre South, which is responsible for some 90% of Brazilian output, at 3.41m tonnes in the second half of July.

Besides being up 9.5% year on year, production at that level was some 200,000 tonnes ahead of market expectations, as gauged by a survey by S&P Global Platts.

And it reflected a cane crush which, at 50.74m tonnes, up some 2.6% year on year, came in a little ahead of market expectations too.

'Drastically altered'

The accelerating pace of processing – which continued to catch up with last year's volumes, which were boosted by an unusually early start to the crushing season – has been spurred by drier weather which has allowed speedy harvesting of cane.

However, Unica cautioned of a downside to the dryness too, in terms of constraining future prospects for cane yield, which are boosted by moisture.

At the start of the season, in April, climatic conditions and field observations "indicated a recovery of yield, even with older cane fields," which tend to be less productive.

"This perception has been drastically altered after this prolonged period without rain," the group said.

"Important sugar cane regions already express concern about the potential impact of this scenario" on the outcome of the current campaign."

Monitoring the impact of the dryness on cane crops "will be fundamental" to determining whether revisions are needed for industry forecasts, particularly for cane volumes, Unica said.

Sugar vs ethanol

The impact on prices of the report was actually to foster some recovery in New York sugar futures, which for October stood at 13.21 cents a pound some 90 minutes after the data, a drop of 0.2% on the day, but up from the 13.13 cents a pound at which they stood ahead of the release.

Indeed, the Unica caution also follows observations form analysts of another potential squeeze on sugar output, with prices deemed have fallen below so-called ethanol parity – the level at which mills have equal financial incentive to manufacture either the sweetener or the biofuel from cane.

This relationship was underlined on Thursday by Cosan, Brazil's sector leaders, which said that while it was "focused on maximising sugar" output over ethanol output - processing 67% of cane from the early harvest into sugar, up from 55% a year before – the reward dynamics were changing.

The group's Raizen division "analyses the profitability of each products on a daily basis", Paula Kovarsky, the group's investor relations head told investors.

Hedging strategy

Ms Kovarsky added that Cosan remained sanguine on prospects for sugar values, saying that "while the market continues pricing a surplus in the current crop", evident in weakness in futures, "we still see as it as more of a short-term pressure on prices".

Such an outlook was evident in forward sugar hedging, in which "not much was advanced".

As of the end of June, Cosan had sold forward 2.11m tonnes of sugar for this season, and 329,300 tonnes of sugar for 2018-19.

That compares with figures of 1.83m tonnes and 228,800 tonnes respectively as of the end of March.

At the end of June last year, the group had sold forward 2.57m tonnes of sugar for 2016-17, and 954,700 tonnes for 2017-18.

Cosan expects its sugar output to hit 4.30m-4.70m tonnes this season, up from 4.23m tonnes in 2016-17.

By Mike Verdin

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