Brazil's sugar mills have already sold as much as three-quarters of their projected output for this season, far more than a year ago, limiting the risk that tumbling prices for the sweetener will drive them to use more of their cane to make ethanol instead.
New York raw sugar futures plunged below 20 cents a pound this week for the first time in 21 months, raising ideas that mills in Brazil, the world's top sugar producer, might earn more tending to the undersupplied domestic fuel market by making more ethanol. For the moment, the economic incentive is absent: as long as sugar prices remain above about 18.50 cents, selling cane is more profitable than selling ethanol, analysts estimate.
But even a further decline in prices may not prompt the kind of switching that could tighten the global sugar market. There are two reasons: the local currency has been weakening versus the dollar; and mills had already booked large forward sales before sugar prices slumped 25 percent over the past two months.
"At the moment, we're observing the market without any decision regarding a change to the mix," said Pedro Parente, President of Bunge Brasil, one of Brazil's biggest sugar and ethanol producers. He expected Bunge mills would use about 60 percent of their cane to produce sugar with the remainder going to ethanol production. Only one of Bunge's eight mills is a dedicated ethanol-only plant. The remainder make both products.
US commodity trader ADM estimates around 75 percent of forthcoming sugar production has been sold, compared with about 50 percent last year. The bulk of the sales were concluded at about 24-25 cents per lb, insulating producers from the drop in prices. The price drop "won't have any impact," Marco Antonio Rego, trade manager for sugar and ethanol at ADM, said at an agribusiness seminar hosted by the Sao Paulo commodities exchange BM&FBovespa this week.