War and Rising Energy Prices Threaten Global Sugar Supplies

SadaNews - Analysts stated that the sharp rise in energy prices, coupled with the ongoing war in the Middle East, will drive sugarcane processing plants in Brazil to increase ethanol production and reduce sugar output in the upcoming season, which starts in the coming weeks.

Raw sugar contracts on the ICE exchange jumped by more than 3% on Monday, in line with rising oil prices, as traders anticipate a decrease in supply coming from the central and southern regions of Brazil, the world’s largest sugar-producing area.

Sugarcane mills have flexibility in adjusting their production between sugar and ethanol according to market price changes. When ethanol becomes more profitable, the mills allocate a larger portion of the cane to produce biofuel instead of sugar, which is currently happening with the increase in ethanol prices and the potential for further rises.

Arnaldo Korea, managing partner at Archer Consulting, a firm specializing in the sugar sector, said: "The rise in fossil fuel prices usually enhances ethanol returns, prompting mills to allocate a greater share of sugarcane to biofuel production."

He added that the current situation could theoretically lead to a decline in global sugar supply and an increase in prices in international markets.

A Critical Factor That Hasn't Shifted Yet

However, analysts pointed out that there is a significant factor that has not changed yet, which is domestic fuel prices in Brazil. The state-owned company Petrobras, which provides about 80% of the gasoline in the country, has not raised local prices yet, despite the substantial jump in global oil prices.

The Brazilian Fuel Importer Group ABICOM estimates that local gasoline prices are currently about 46% lower than the parity with import prices.

Independent sugar market analyst Michael McDougall stated that political pressures could play a role in delaying price adjustments, noting that Brazilian President Luiz Inácio Lula da Silva may seek to maintain voter support ahead of the elections scheduled for next October.

New Season Expectations

The agricultural consulting firm Datagro had anticipated before the outbreak of the war in Iran that Brazilian mills would reduce the share of sugarcane directed for sugar production to 48.5% in the new season, compared to about 50.7% in the last season.