Brazil cane harvest kicks off with whimper

Brazil's center-south sugar and ethanol industry officially kicked off its 2020-21 crushing season today under the cloud of the coronavirus pandemic and a collapse in oil prices, shattering the odds of a third consecutive year of recovery.

In response to the oil price crash, state-controlled Petrobras cut the average domestic wholesale gasoline price by a staggering 35.5pc in March to R1.09/liter ($0.78/USG), after lowering it by 5pc and 7pc respectively in February and January, squeezing mills' margins for hydrous ethanol.

The average consumer price of hydrous fell to R3.217/l in March, down from R3.248/l in February, according to pricing data from hydrocarbons regulator ANP. The biofuel is now only competitive against gasoline at the pump in Sao Paulo and Goias states.

Mills are grappling with more than just sharp declines in ethanol prices. Sugar futures prices on the New York Ice exchange have fallen from a one-year peak of more than $0.15/lb on 20 February to nearly $0.10/lb on March 31, the lowest level in 12 years.

Nonetheless, center-south mills are expected to allocate close to 44pc of their harvested cane to sugar production in the current season, down from 34.4pc in the 2019-20 season, according to Unica's latest estimates.

On the bright side, the health of the center-south crop has improved over the past two crops, after more favorable weather and ongoing investments in replanting of aging fields in the run-up to the center-south harvest.

Local sugar and ethanol consultancy Datagro projected the 2020-21 cane harvest in the center-south to reach 596mn metric tons (t). With just two weeks left to tally in the 2019-20 season, Unica reported that mills in the center-south had crushed 582.9mn t from April 2019 to mid-March this year.

"It was going to be one of the better years for the sector," agro-economics professor Marco Fava Neves said of the new season.

Additionally, Brazil's new biofuels regulatory framework Renovabio, which will enable biofuel producers to generate and trade carbon credits (Cbios), was also in line to start up this year, promising to offer new revenue sources for mills. But implementation could be slowed by the current crisis, largely because fuel distributors bear the burden of purchasing the Cbios to guarantee that Brazil meets its annual decarbonization targets.

Yet another aggravating factor is cash flow. Fuel and power distributors that have contracts to buy ethanol and electricity from mills are declaring force majeure, which is threatening to exhaust mills' working capital over the next three months, Unica's technical director Antonio de Padua Rodrigues said.

Mills, especially those carrying larger debts and higher credit risks, have traditionally relied on domestic ethanol sales early in the harvest to generate quick working capital, but it is unclear how crushing will pan out in the coming months.

Unica estimates that 198 cane mills will be crushing by mid-April, up from 157 mills at the same time last year.