Required Report - public distribution

**Date:** 4/10/2006

**GAIN Report Number:** BR6002

BR6002

**Brazil**

**Sugar**

**Annual**

**2006**

**Approved by:**

![](media/image1.wmf)Morgan Perkins, Director

U.S. Agricultural Trade Office

**Prepared by:**

Sergio Barros, Agricultural Specialist

**Report Highlights:**

At 420 million metric tons, the MY 2006/07 sugarcane crop should rebound
from the previous year. In spite of highly attractive sugar prices,
sugar production will be restrained by strong ethanol demand both in the
domestic and international markets. ATO/Sao Paulo projects sugar
production at 30.34 mmt, raw value, while exports are forecast at 19.15
mmt. Ethanol exports should remain stable at 2.6 billion liters.

Includes PSD Changes: Yes

Includes Trade Matrix: No

Annual Report

Sao Paulo \[BR3\]

\[BR\]

Table of Contents

[PS&D Tables 3](#psd-tables)

[Production 4](#production)

[Sugarcane 4](#sugarcane)

[Area 5](#area)

[Yields 6](#yields)

[Sugar and Ethanol -- MY 2005/06 7](#sugar-and-ethanol-my-200506)

[Sugar and Ethanol -- MY 2006/07 9](#sugar-and-ethanol-my-200607)

[Sugarcane, Sugar and Ethanol Prices in the Domestic Market
11](#sugarcane-sugar-and-ethanol-prices-in-the-domestic-market)

[Consumption 12](#consumption)

[Trade 12](#trade)

[Sugar Exports 12](#sugar-exports)

[Ethanol Exports 13](#ethanol-exports)

[Stocks 14](#stocks)

[Exchange Rate 14](#exchange-rate)

# PS&D Tables

![](media/image2.wmf)

![](media/image3.wmf)

# Production

## Sugarcane

## 

The estimate of Brazilian sugarcane production for marketing year (MY)
2005/06 (May-April) was revised downward to 385 million metric tons
(mmt), a 5 percent decrease relative to the previous (Fall 2005)
estimate.

The North-Northeastern (NNE) region's harvest is virtually over and
should account for 48 mmt (MY 2005/06), down 9 mmt from previous MY due
to weather problems. The Center-South (CS) crushed 337 mmt, a notable
decrease compared to industry estimates during the harvest season (345
-- 355 mmt). The dry weather during the development of the stalks
(November 2004 -- March 2005) affected the agricultural yields, thus
decreasing total production.

The CS crushing season ended in November for the majority of
sugar-ethanol plants. Low rainfall levels not only reduced agricultural
yields, but allowed for uninterrupted harvest operations. As such, cane
was cut and crushed at an accelerated pace, leading to an
earlier-than-usal end to the 2005 harvest.

The Agricultural Trade Office (ATO)/Sao Paulo forecasts total Brazilian
sugarcane production for MY 2006/07 (May-April) at 420 mmt, up 35 mmt
from MY 2005/06 as a consequence of better yields both in the CS and NNE
regions and area expansion in the CS. Most of the increase should come
from the CS where a total of 370 mmt of sugarcane are expected to be
crushed.

The CS harvest season started in mid-March for sugar-alcohol mills
located in the state of Parana and in April for mills in the state of
Sao Paulo, where the majority of the sugarcane fields are located.
Despite the fact that the official crushing season starts in May, it has
become quite usual to commence operations in March-April. Indeed, the
industry has been working with a longer crushing season during recent
years. This is particularly true for 2006 when both the sugar and
ethanol markets show clear signs of shortages in supply.

The sugar-ethanol industry is strongly committed to producing about 800
million liters of ethanol by the end of April, in order to avoid any
lack of product at the pump. The plants in the CS should run through
December. The NNE harvest season is not expected to begin before August.

The following tables show monthly sugarcane crush data for the state of
São Paulo and the CS region from the 2000/01 to 2005/06 crops
(April-March), as reported by the Sugar and Alcohol Millers Association
of São Paulo State (UNICA).

![](media/image4.wmf)

![](media/image5.wmf)

## Area

Total sugarcane area for MY 2006/07 is forecast at 6.55 million hectares
(ha), up 5 percent from MY 2005/06 (6.25 million ha.). Total area for
harvest for MY 2006/07 is projected at 5.94 million ha, an additional
333,000 ha. vis-à-vis the previous season.

The table below shows area for sugarcane production, according to the
Brazilian Institute of Geography and Statistics (IBGE), UNICA and the
Agricultural Economics Institute (IEA) of the State of Sao Paulo
Secretariat of Agriculture.

![](media/image6.wmf)

As noted in previous reports, most area expansion has taken place in the
CS region, driven by steady sugar and ethanol prices in both the
domestic and international markets. Sugar and ethanol prices remain very
attractive relative to other commodities, supporting conversion from
cattle, grain and permanent crops such as oranges and coffee to
sugarcane.

Conservative forecasts estimate that 570 mmt of sugarcane will be needed
to meet projected demand by 2010/11, an increase of 150 mmt from
2006/07. Updated figures from the industry reports that approximately 20
and 25 new plants will start operations in 2006 and 2007, respectively.
These plants usually start to crush at one third of total capacity
(estimated at 1.5 mmt of sugarcane per plant). New projects normally
begin solely with ethanol production to maximize the industrial
efficiency.

According to UNICA and Datagro, a major consulting firm, a likely
scenario for the 2012/13 crop includes 92 new projects, milling up to
630 mmt of sugarcane, with over 80 percent of those in the CS. Total
investments required amounts to US\$ 10 billion. The Brazilian press has
regularly announced the interest of European and U.S. holdings in
building sugar-ethanol plants in Brazil.

## Yields

The agricultural yield for sugarcane for 2005/06 is estimated at 68.3
metric tons per hectare (mt/ha), down 3.2 mt/ha. from initial estimates.
The dry weather during the development of the sugarcane both in the CS
and the NE contributed to reduce the overall yield. The agricultural
yield for MY 2006/07 is expected to recover and current post projection
is 70.7 mt/ha.

The MY 2005/06 industrial yield is estimated at 144.08 kg TRS (total
reducing sugars)/mt. The dry weather that prevailed along the harvest
season supported the higher sugar content relative to MY 2004/05 (143.46
kg TRS/mt). ATO/Sao Paulo forecasts the industrial yield for MY 2006/07
at 144.29 kg TRS/mt.

According to UNICA, the average industrial yield for the 2005/06 crop in
the CS is 144.22 kg TRS/mt, practically unchanged from MY 2004/05
(144.18 kg TRS/mt). The following table shows historical industrial
yields since MY 1997/98, measured in TRS per metric ton of sugarcane.

![](media/image7.wmf)

## Sugar and Ethanol -- MY 2005/06

The 2005/06 production was driven by the prominent increase in the
ethanol demand, reversing the trend towards increased sugar production
that had prevailed in previous years. Indeed, the TRS breakdown for
sugar and alcohol production is estimated at 48.6 and 51.4 percent,
respectively, compared to 50.1-49.9 percent for MY 2004/05.

Strong domestic demand for ethanol led to production of an additional
750 million liters vis-à-vis the previous crop season. Brazilian
consumption of ethanol is estimated by the industry at 14.2 billion
liters. The enormous success of the flex-fuel vehicles (FFV) sales (see
table below) pushed up the consumption of hydrated ethanol. Current
figures shows that over 80 percent of passenger car monthly sales are
FFV.

![](media/image8.wmf)

The National Association of Vehicle Manufacturers (ANFAVEA) estimates
that in 2005 FFV represented 5.8 percent of the total Brazilian light
vehicles fleet, whereas exclusively ethanol-powered cars represented
18.1 percent. The share of FFV vehicles in the market is still small,
but should increase steadily as automobile manufacturers move towards
this new technology. There are currently 7 manufactures in Brazil
selling 89 different models of FFV.

Sustained ethanol exports during the 2005/06 cycle also supported the
higher demand for ethanol. In combination with the drop in the sugarcane
crop, these factors led to restrained sugar production for MY 2005/06,
which is estimated at 27.08 million metric tons (mmt), raw value, down
about 1.1 mmt, raw value, compared to MY 2004/05.

Brazilian alcohol production for MY 2005/06 is estimated at 15.85
billion liters (8 and 7.85 billion liters of anhydrous and hydrated
alcohol, respectively). According to the Brazilian Ministry of
Agriculture, Livestock and Supply (MAPA), cumulative alcohol production
for the 2005/06 crop though December 1, 2005 was reported at 14.19
billion liters -- 7.37 billion liters of anhydrous ethanol and 6.82
billion liters of hydrated ethanol. As reported by MAPA, final numbers
for alcohol production for the 2004/05 crop through March 1, 2005 was
15.2 billion liters -- 8.2 billion liters of anhydrous alcohol and 7
billion liters of hydrated alcohol. For additional info on the ethanol
sector, see BR6001.

![](media/image9.wmf)

The tables below show monthly sugar production for the state of Sao
Paulo and the CS region for the 2001/02 to 2005/06 crops (April-Mach),
as reported by UNICA.

![](media/image10.wmf)

![](media/image11.wmf)

## Sugar and Ethanol -- MY 2006/07

For the sugar industry the scenario for MY 2006/07 could not be better,
as attractive prices for both sugar and alcohol in the domestic and
international markets remain, as a consequence of the strong demand for
both products.

From a strictly economic standpoint, sugar-ethanol plants should divert
sugarcane crush towards sugar production for 2006/07, since the
international prices are highly attractive. Price equivalences among
competing sugarcane products are shown below. Sugar export prices should
remain highly attractive sustained by the steady increase in world
demand (3.4 mmt per year). In addition, the commitment of the European
Union to comply with the World Trade Organization (WTO) decision
regarding its sugar regime should create at least an extra 5 mmt market,
in coming years.

![](media/image12.wmf)

Sugar-ethanol mills cannot divert crush exclusively toward sugar
production. Each unit is built with a certain capacity for sugar and
ethanol production. There is some flexibility towards one product or the
other but plants are restricted with regard this flexibility.
Northeastern mills follow a configuration that prioritizes sugar
production. Indeed, historically, NNE mills divert over 60 percent of
total TRS to sugar. The CS plants are usually set for a 50/50
sugar/ethanol production mix. Industry sources report that this
elasticity could reach 55 to 60 percent both ways. Moreover, there are
some units (distilleries) which produce exclusively ethanol and new
projects commonly start operations with solely ethanol production in
order to maximize the efficiency of the plant.

From a supply standpoint, the rebirth of ethanol market is a reality and
the industry cannot afford to lose their credibility with and confidence
from the Brazilian consumer. This was a big issue in the late eighties
when a generalized shortage undermined the confidence of the consumer in
the alcohol program (Proalcool). The current ethanol situation bears
slight resemblances to that period- ethanol prices have systematically
increased at the pump, and the Brazilian government (GOB) and consumers
have criticized those increases in prices- but there is no underlying
supply crisis.

Furthermore, there is a concern that local ethanol shortages might occur
in the second part of April. Existing ethanol stocks are virtually zero
and the 06/07 crushing season began in March/April in order to supply an
extra 800 million liters estimated to meet the demand.

The industry has also been promoting development of a world ethanol
market and the exports have increased in the past couple of years. If
Brazil wants to position itself as a global supplier, the country must
show consistency in regular ethanol production.

The GOB also plays an important role. The government has constantly
monitored the ethanol market seeking ways to guarantee the domestic
supply of sugar and ethanol. On March 1, the GOB decreased the
percentage of ethanol blended in the gasoline from 25 back to 20 percent
for the foreseeable future. This measure is an attempt to reduce the
demand for ethanol by 1 billion liters per year.

ATO/Sao Paulo projects the 2006/07 TRS breakdown for sugar and alcohol
production at 50.12 and 49.88 percent, respectively, showing a slight
trend towards sugar production. Total Brazilian sugar production for MY
2006/07 is forecast at 30.34 million metric ton (mmt), raw value, a 12
percent increase compared MY 2005/06 (27.08 mmt). The CS states should
account for 26.17 mmt, raw value, up 3.07 mmt from MY previous season.
The NNE should contribute 4.17 mmt of sugar, raw value, up 190,000
metric tons from MY 2005/06.

Total alcohol production for MY 2006/07 is projected at 16.8 billion
liters -- 7.3 billion liters of anhydrous alcohol and 9.5 billion liters
of hydrated alcohol.

## 

## 

## Sugarcane, Sugar and Ethanol Prices in the Domestic Market

The State of Sao Paulo Sugarcane, Sugar and Alcohol Growers Council
(CONSECANA) reports that the average sugarcane price (May-October 2005)
for the state of Sao Paulo for the 2005/06 crop is Reais (R\$) 0.2350
per kg of TRS, or R\$ 34.03 per ton of sugarcane. The average price for
the 2004/05 crop was reported at R\$0.2424 per kg of TRS, or
approximately R\$34,96 per ton of sugarcane.

The Crystal Sugar and Ethanol Indexes released by the University of Sao
Paulo's College of Agriculture \"Luiz de Queiroz\" (ESALQ) follow. The
Indexes track crystal sugar, anhydrous and hydrated prices received by
producers in the domestic spot market. Prices are expected to drop with
the beginning of the harvest season, however, they should remain fairly
high as a consequence of strong demand.

![](media/image13.wmf)

![](media/image14.wmf)

# Consumption

ATO/Sao Paulo estimates the Brazilian MY 2005/06 consumption at 10.79
mmt, raw value. Post forecasts sugar consumption for MY 2006/07 at 10.95
mmt, raw value, up 1.5 percent from 2005/06, reflecting Brazilian
population growth and a continued expansion in food processing.

# Trade

## Sugar Exports

Total Brazilian sugar exports for MY 2005/06 are estimated at 16.97 mmt,
raw value, a decrease of more than 1 mmt from MY 2004/05 due to reduced
supply and increased demand for ethanol production. Raw sugar should
account for 12.57 mmt, raw value, whereas the remaining 4.4 mmt
represents refined exports.

Sugar exports for MY 2006/07 are projected at 19.15 mmt, raw value, up
2.2 million mmt relative to the previous MY. Sugar export prices should
remain extremely attractive. Raw sugar exports are forecast at 14.4 mmt,
while refined exports should contribute 4.75 mmt, raw value. Note that
approximately 30 percent of total TRS is expected to be diverted to
sugar for exports for MY 2006/07.

The following tables show Brazilian sugar exports by destination for MY
2004/05 and MY 2005/06, as reported by the Brazilian Secretariat of
Foreign Trade (SECEX).

![](media/image15.wmf)

![](media/image16.wmf)

## Ethanol Exports

# 

Total Brazilian alcohol exports for MY 2006/07 are projected at 2.6
billion liters, similar to ethanol exports for MY 2005/06. Cumulative
alcohol exports for MY 2005/06 until February 2006 are estimated at 2.16
billion liters, as reported by SECEX. Approximately 250 million liters
were shipped to the U.S. during this period. Other major alcohol exports
included India, Japan and the Netherlands, and the Caribbean.

The U.S. Government's Caribbean Basis Initiative (CBI) agreement, which
exempts U.S. alcohol imports from the Caribbean from payment of the
US\$0.54 per gallon import tariff, encouraged Brazilian alcohol exports
to that region. The following tables show Brazilian alcohol exports by
country of destination, as reported by SECEX.

![](media/image17.wmf)

![](media/image18.wmf)

# Stocks

Domestic MY 2005/06 carry over stocks were adjusted downward to --90,000
mt, raw value, based on industry information. Negative stocks have been
balanced by the early start of the sugarcane harvest in the CS region.
Sugar ending stocks for MY 2006/07 are projected at 150,000 mt, raw
value.

# Exchange Rate

![](media/image19.wmf)