Sugar Prices Could Rise if Brazil Tilts to Greater Ethanol Production

High crude oil and gasoline prices are boosting demand for ethanol and increasing the likelihood that sugar mills in Brazil will direct a greater percentage of their sugarcane crop to domestic ethanol production. 

With Brazil’s sugar stocks already running 35% below their historical average, any further tightening in the country’s sugar supplies could push sugar prices higher and squeeze profit margins for users ranging from candy and snack makers to bakeries and soft drink manufacturers. 

Prospects could improve, however, when this season’s sugarcane harvest begins in April. Recently, the dry conditions brought on by the La Niña weather pattern have started to ease in Brazil, which has raised the possibility of a stronger crop. According to the Gro Climate Risk Navigator application, sugarcane fields in São Paulo, the biggest producing state, have already seen 49% more rainfall in the first three months of 2022 compared to the same period last year. 

Sugar prices, which have shot up 20% in the past 12 months, are already increasing input costs for some popular consumer items. For example, largely due to rising sugar prices, the cost of making a popular milk chocolate bar that contains 15% sugar, as well as other ingredients, has increased 21.5% year-over-year, according to Gro’s Custom Price Index application.

Gro’s new Custom Price Index application lets food manufacturers create a price index that is tailored to a specific product’s key ingredients and weightings so that they can better manage their margins and understand their underlying costs.  

Brazil is the world’s largest sugar producer and exporter, and its sugar mills can switch between sugar and ethanol production based on market prices. Last year, 54% of sugarcane went into producing ethanol, close to the 10-year average of 56%.

In Brazil, year-over-year hydrous ethanol prices have climbed 20% to $5.34, as crude oil prices have skyrocketed to their highest levels since September 2014. Domestically, the gap between ethanol and gasoline has also widened. Average ethanol retail prices are currently $1.40 below gasoline prices. The spread between the two products has widened 29% since Jan. 2, 2022.

Meanwhile, sugar futures prices have also soared, largely because La Niña-induced prolonged drought conditions reduced the sugarcane harvest in Brazil’s 2021/2022 marketing year, which resulted in a 14% decline in sugar production. That outcome limited availability from the world’s largest sugar exporter. 

However, global sugar stocks have been stabilized by a record sugar production in India and a strong crop in Thailand. Brazil also increased its percentage of sugarcane processed into sugar in the past two years to 45% from 35% previously, while ethanol production declined. 

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