Sugar supplies in the bag as panic ends

Not so long ago, the prospect of a global sugar shortage gave food manufacturers a panic attack.

Poor weather conditions hitting crops in the world's two biggest sugar-producing nations, Brazil and India, sent the price of the sweet stuff soaring on international markets.

In August last year, US firms such as Kraft Food, General Mills and chocolate-maker Hershey were so worried that they wrote a joint letter to the country's government, calling in vain for the right to import more sugar tariff-free.

After that, prices kept on climbing until 1 February, when sugar futures peaked at 30.4 cents a pound, the dearest they had been since January 1981.

But since then, the decline has been dizzying. Sugar is now trading at no more than half that level, as production in both Brazil and India looks set to bounce back.

The collapse in the sugar price is clearly a worry for the industry, which needs to invest in planting new canes and upgrading its mills. But for now, there is some relief at the prospect of a bumper crop.

"We in Brazil have had two challenging harvests in a row," says Emmanuel Desplechin of the country's Unica sugar-cane industry association.

"It's very seasonal. We always depend on weather conditions at the moment of the harvest."

The start of last year's monsoon in the Asian subcontinent was the weakest for many years, leading to widespread drought that hit India's sugar-cane crop hard.

However, late rainfall boosted cane yields. Instead of a predicted harvest of 13 million tonnes of sugar for the 2009-10 season, India has managed to produce 18.5 million tonnes.

While India was struggling with a lack of rain, Brazil had the opposite problem. Its crops were waterlogged by heavier-than-expected downpours in the Centre-South region of the country, the biggest sugar-cane growing area in the world.

But now Brazil expects the region's forthcoming 2010-11 harvest to be its biggest on record, with a projected 33.5 million tonnes of sugar.

Of course, once crushed, Brazil's sugar-cane is more likely to end up in fuel than in food.

In recent years, 60% of the country's sucrose has been turned into ethanol instead of sugar, as Brazilian roads have seen a big increase in the number of "flex-fuel" cars running on a mix of petrol and alcohol.

More than 90% of new cars in Brazil can handle ethanol as a fuel, thanks to a biofuel programme that began in the mid-1970s, as a way for the military government of the day to reduce its dependence on oil imports.

So far, this model has not been widely copied in other countries.

However, Mr Desplechin, who represents Brazil's sugar-cane industry in Brussels, is confident that this will change in line with EU legislation requiring 10% of transport fuel to come from renewable sources by 2020.

"Legislation will drive the need for biofuels," he says, adding that unlike electric cars, ethanol is already available at reasonable cost.

In fact, he maintains, it is cheaper than petrol and produces lower greenhouse gas emissions.

"In Europe, the flex-fuel vehicle is not that developed, but you can still achieve some savings by blending ethanol with regular petrol."

As it happens, Brazil's sugar-cane is now producing not only biofuel, but bio-electricity as well.

The residue from the crushed cane, known as "bagasse", is burned to power the cane mills themselves, which are self-sufficient in energy as a result.

However, the mills produce more electricity than they actually need, so the surplus is "exported" to the Brazilian national grid.

About 3% of the country's electricity now comes from this source. Unica predicts that this will increase to 14% by 2020.

"The beauty is that we are using everything in the cane," says Mr Desplechin.

And using sugar-cane residue to generate electricity complements the hydro-electric plants that provide much of Brazil's power, since the bagasse-fuelled bio-electricity kicks in during the dry season when water levels are low.

Brazil looks set to maintain its position as the world's largest sugar producer and second-biggest ethanol producer.

According to the country's agriculture ministry, it will produce 28.5 billion litres of ethanol in the 2010-11 season, up from 25.8 billion the year before.

But the current low prices for both sugar and ethanol are putting pressure on Brazil's largely family-owned cane mills and forcing consolidation in the industry.

Oil firms are buying into the sector in a big way. Last month, state-owned Petrobras spent $920m on a 46% share of the country's fourth-largest ethanol group, Acucar Guarani.

And earlier this year, Royal Dutch Shell announced a $12bn tie-up with Brazilian firm Cosan, the world's biggest ethanol and sugar processor, that will see them merge their ethanol and fuel distribution units.

Other foreign firms are also investing in Brazilian ethanol. In the past three years, the proportion of Brazilian cane ethanol mills with foreign backing has gone up from 7% to 22%, according to consulting group Dextron Management.

Although the market is growing in size, Brazil intends to carry on exporting a steady 15% of its ethanol. But it still needs better transport links to allow the product to be shipped more easily to where it is needed.

"At the moment, we have no pipeline for ethanol," admits Mr Desplechin. Plans to pipe ethanol from the interior of Sao Paulo state to the port of Santos are still in their infancy - but as the worldwide appetite for sustainable fuel grows, the project is clearly a major priority for the future.