By Marcelo Teixeira

(Reuters). Brazilian sugar cane mills cancelling sugar export contracts are shifting production to ethanol, in an effort to cash in on the high energy prices. This raises concern about a possible sugar shortage.

A trader for a major international commodities merchant said that cancellations have occurred at almost every sugar trading company in Brazil. This was reported by Reuters last week, while attending Sugar Week New York. The total number of cancellations was between 200,000 and 400,000 tonnes raw sugar, he estimated.

Trader: “It’s happening because the production mix changes and also because the crop delay.”

Brazil exports approximately 2.2 million tonnes per month in the peak crop season. Some traders believe that a large drop in sugar production could cause a worldwide shortage.

Brazil’s mills are very flexible, and they can shift partially from sugar to ethanol production. Production is currently shifting to ethanol because of high fuel prices, which are driven by the pandemic recovery in Ukraine and increased production.

According to recent analyst projections, biofuels sales are more profitable than ever for mills. This is reflected in lower sugar production numbers and higher volumes of ethanol. In April, sales rose by 2.6%

The cancellations were confirmed by a second trader who works for a major international food merchant. He said that although these contracts are taken-or-pay, they do come with a cost, and sometimes it could prove costly for the mill.

A Brazilian executive who did not want to be identified said that switching to ethanol from sugar was a win-win situation. He also stated that cancellations are costly. Brazil is the second-largest ethanol producer in the world, after the United States.

He said that ethanol sales can be paid within one to two days while export sugar requires much more time and the mills must pay many bills in harvest kick-off.

Late last week hydrous ethanol traded at 20 cents per kilogram, while New York sugar futures were slightly higher at 19 cents per kg. [SOF/L]

The sugarcane crop was used by mills to produce sugar, and 55% for ethanol. Each percentage point equals approximately 700,000 tonnes sugar.

UNICA has data that shows the lowest sugar mixture was 34.3% for 2019, which is a year of low prices. In 2006, higher sugar prices prevailed and the highest level was at 49.7%.