Are Brazilian Sugar Expectations Too High?

In a report rolled out Monday, Morgan Stanley’s Latin America Agribusiness analysts Javier Martinez de Olcoz Cerdan, Rodrigo Mugaburu and Lee Jackson looked into the Brazilian sugar market and its prospects for 2015 and 2016.

The experts concluded that, according to their projections, there is downside to the Brazilian Sugarcane Industry Association (UNICA). Consensus estimates for sugar production in 2015/2016 in the Central/South region currently stand at 31-32 million tons. As stated by the note, lower year-over-year total return swap rates and a higher ethanol/sugar mix could represent major headwinds and lead to another year-over-year decay in sugar production.

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Moreover, the analysts see additional risks to cane crushing volumes in an early El Niño warm rush and “limited installed capacity” (a consequence of low investments over the past seven years).

Sugar Scenarios

The table below illustrates a few scenarios for sugar production. The chart compares UNICA and consensus estimates with São Martinho projections.

Source: Morgan Stanley

Looking Ahead

Despite what was said above, the analysts at Morgan Stanley remain bullish on sugar and expect prices to surge in the second half of the year “as the global market falls into deficit for the first year in six.”

The experts explained that this deficit should be driven mainly by the decline in “Brazil's output and sugar mix to 7-year lows, as government policies spur the largest YoY increase in hydrous demand since 2008, diverting cane from sugar to ethanol production.”

The firm recommends Cosan SA Industria e Comercio (BVMF: CSAN3) as the best way to play the recovery in the sugar market. Adecoagro SA (NYSE: AGRO) is also rated at Overweight.

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