Brazilian Millers: Current Sugar Prices Stifle Production Growth, Market Balance Constrained

On Monday, Brazilian millers stated that the current reference prices for raw sugar (SBc1) are insufficient to warrant investment in new plants. Additionally, the marginal increases in production achievable through adjustments to existing plants are nearly at their limit.
Sugar demand has been growing steadily at around 2% per year. However, production has been hampered by various factors including climate change and biofuel blending policies, such as those in India. This has led to a tight supply and demand balance in the sugar market.
Rodrigo Penna de Siqueira, the chief financial officer at Jalles Machado (JALL3.SA) mill, one of Brazil’s largest sugar groups, explained, “When you run an analysis of a potential investment in a new sugar plant, with a sugar mix of 50%, the internal rate of return is 9%, so there is no incentive.” He emphasized that prices need to rise and remain elevated for an extended period to encourage new investments. These remarks were made during a conference organized by investment bank BTG Pactual in Sao Paulo, and other executives shared similar viewpoints.
Renato Junqueira, vice president at Adecoagro (AGRO.N), which operates three mills in Brazil, said, “Brazil’s capacity to put more sugar in the market is nearing the limit.”
Brazilian mills have indeed made investments over the past two years to increase the sugar mix, that is, the ability to divert more sugarcane to produce sugar instead of cane-based ethanol. Consultancy FG/A estimates that changes to the sugar mix have resulted in an additional sugar production capacity of 2.6 million tons in Brazil.
Nevertheless, the executives pointed out that there are limitations to what can be done within existing plants.
Pierre Santoul, head of Tereos Brasil, noted that any additional sugar production capacity will most likely come from sugarcane rather than sugar beet. He also believes that India, the world’s second largest sugarcane producer, will not boost its sugar production due to the diversion of cane juice for ethanol to meet its blending program. This, in turn, will keep the global sugar market in a tight state. He further stated, “We have a constructive view for prices (going forward).”

Brazilian Millers: Current Sugar Prices Stifle Production Growth, Market Balance Constrained
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