Brazil cost decline to force Black Sea shift out of sugar

Mon Feb 4, 2013 11:44am EST

* Least efficient Russia, Ukraine growers seen exiting sugar

* Financial health of Brazil mills to improve as costs fall

* Brazil mills seen close to full capacity in 2013/14

By David Brough

DUBAI, Feb 4 (Reuters) - Cane production costs in top sugar exporter Brazil have started to fall due to the prospect of a bounteous harvest and will force some of the least efficient beet growers, many of them in Eastern Europe, to switch out of sugar.

Delegates at a major sugar industry conference in Dubai said sugar beet farmers can more easily move into alternative crops such as grains, while investment in cane planting is much more expensive.

The fall in costs will also improve the bottom line of financially strapped Brazilian mills, they said.

"The cost of production in Brazil had been rising significantly and this enabled other countries to compete," said Jonathan Kingsman, head of agriculture at news provider Platts and host of the Feb. 2-5 conference.

"As Brazilian industry recovers, the costs of production will fall due to rising production capacity. These other countries, which had increased sugar production, will have to compete with Brazil. Russia maybe can't; Ukraine maybe can't."

The Union of Russian Sugar Producers has said it expects the area planted in beets to drop by 8.4 percent next season.

Russia brought forward purchases of Brazilian raw sugar to take advantage of cheap offers before a possible increase in its import tariff on May 1, sources at two trade houses said.

Russia, which was the world's top raw sugar importer a decade ago, has been moving towards self-sufficiency in sugar in recent years, shielded by the rising production costs in Brazil, which has been the source of its imports.

Many Russian farmers now could switch from sugar beet to more remunerative wheat crops, several analysts said.

"In Russia, there could be a definite switch to wheat," Keith Flury, a senior soft commodities analyst with Rabobank, said before the conference.

"Russia might be able to realise good revenues from grains."

Russia is also a leading wheat exporter.

Global sugar futures have almost halved in price after reaching a peak of 36.08 U.S. cents a lb in February 2011. Wheat prices, meanwhile, are roughly in line with those paid two years ago.

Jonathan Drake, head of RCMA Sugar, said in an interview that the most efficient Russian growers would continue to produce beet.

The lower Brazilian production costs are not expected to have any impact on sugar production decisions in the European Union because of heavily protected prices in the bloc, which are well above global market levels, trade sources said.

HIGH FIXED COSTS

Brazilian sugar production costs rose in recent years due to factors such as adverse weather, which cut cane throughput in mills, but this trend is now set to reverse as mills ramp up production of a huge harvest in 2013/14, delegates said.

Sugar mills in Brazil have substantial fixed costs and need to produce at near full capacity to keep their marginal costs to a minimum.

"The key for the next Brazilian crop will be the maximum productive capacity. I think we will be close to maximum productive capacity," said Jeremy Austin, managing director of trade house Sucden do Brasil.

"In theory that would mean a productive capacity of 600 to 620 million tonnes."

Several analysts have forecast that 2013/14 cane output in the centre-south of Brazil, the main growing area representing some 90 percent of the crop, will be around 580 million to 585 million tonnes, up from around 532 million in 2012/13.

Brazil's raw sugar production costs are set to fall to some 17-18 cents a lb from 20-22 currently as the volume of cane processed by the mills ratchets higher, delegates in Dubai said.

The falling costs of sugar production in Brazil will alleviate the pain of many mills, which have been struggling financially in recent years due to a lack of available cane to process, traders attending the conference said.

A panel of executives from Brazilian mills agreed that the fall in Brazilian production costs would help the bottom line of mills.

"The falling cost of production in Brazil will bring a sigh of relief to mills that have been struggling to make a profit," one senior London-based analyst said.

Toby Cohen, a director of London-based merchant Czarnikow, said in Dubai that, despite the fall in production costs, many mills would still face financial problems because the current sugar price was too low.

Benchmark ICE raw sugar futures stood at 18.84 cents a lb, down 0.05 cent, on Monday, just above a 2 year and 5 month low of 18.06 cents per lb touched on Jan. 23, pressured by a huge global supply glut following a strong finish to the centre-south Brazilian harvest. (Editing by Nigel Hunt and Jane Baird)