Page last updated at 23:03 GMT, Wednesday, 2 September 2009 00:03 UK

Sugar rush for hyperactive Brics

By Robert Plummer
Business reporter, BBC News

The price of raw sugar is hitting highs not seen for nearly three decades - and the surge is having a sweet-and-sour effect on two of the burgeoning Bric economies.

Sugar cane field near Araraquara, Brazil (photo: Robert Plummer)
Brazil is the largest producer of sugar in the world

Sugar futures reached more than 24 cents a pound this week, the dearest they have been since February 1981.

That makes it a valuable earner for the Centre-South region of Brazil, the largest sugar-cane growing area in the world.

At the same time, Brazil's position is strengthened by a collapse in production in India, the world's number two sugar producer.

The weakest monsoon rains in the Asian subcontinent for many years have led to widespread drought, hitting crops hard.

However, India remains the top consumer of sugar and is relying on Brazilian imports to make up the shortfall.

Up to one million tonnes of Brazilian sugar have been bought by India in recent weeks, according to traders' estimates - and producers are betting that prices may climb as high as 30 cents a pound before the current run peaks.

"There's still room for a further increase in prices if Indian demand remains strong," says Plinio Mario Nastari of Brazil's Datagro consultancy.

Food or fuel?

All splendid news for Brazilian sugar plantation owners, you might think. But whereas India has had a shortage of rainfall, Brazil's cane crops have been waterlogged by heavier-than-expected downpours.

Sugar-cane needs dry weather to ripen in order to maximise its sucrose content, but northern Sao Paulo state, one of the key areas of cultivation, has had its heaviest August rainfall in 60 years.

That means more customers chasing less of the sweet stuff - and those customers include not only people with a sweet tooth, but also the majority of Brazil's motorists.

In recent years, more and more Brazilian sucrose has been turned into ethanol rather than sugar, as the country's roads have seen a huge increase in the number of "flex-fuel" vehicles that run on a mixture of petrol and alcohol.

Cars in Sao Paulo (photo: Robert Plummer)

More than 90% of new cars in Brazil are adapted to accept ethanol as fuel, thanks to a state-run biofuel programme that began during the country's years of military rule as a way of reducing its dependence on oil imports.

So far, the cost of alcohol at the filling station has not reflected the 80% rise in raw sugar prices since the start of this year.

However, pump prices have started to creep up in recent weeks, and analysts expect them to rocket after the end of the sugar-cane harvest, which lasts from April to November.

"India is demanding sugar, which is priced 40% above cost, while alcohol is being sold below cost," says Arnaldo Luiz Correa of Archer Consulting in Sao Paulo.

For that reason, he says, factories will switch production from ethanol to sugar, pushing up fuel costs.

Production boost

If world sugar prices remain high, farmers are bound to plant more canes in future, in the hope of cashing in on the boom.

Sugar prices

There is already pressure on owners of prime Brazilian farmland to divert their resources from other crops, such as oranges, in favour of sugar.

Brazil is the world's biggest producer of orange juice, shipping both frozen and chilled produce around the world in specially-refrigerated vessels.

But orange groves have to be cultivated for several years before they bear useful fruit - and they need much more attention than sugar canes.

In India, the trend appears to be going the other way.

Many farmers moved away from sugar-cane in 2008 because they could get better, government-guaranteed prices for other crops, such as wheat and rice.

Decaying ports

But irrespective of how much sugar Brazilian plantations can produce, the product is useless to foreign markets unless transport links allow it to be shipped to where it is needed.

And according to a recent report by the country's Institute for Applied Economic Studies (Ipea), a government research body, Brazilian ports are badly in need of investment.

Worker on production line at Cosan sugar mill in Barra Bonita, Brazil
Processed sugar is just one use for Brazilian sugar-cane these days

Sugar-producing areas in north-eastern Brazil are served by ports such as Maceio and Cabedelo, which Ipea says are decaying facilities with poor installations.

In all, Ipea says 43bn Brazilian reais ($23.5bn) should be spent on upgrading the country's ports before the global economy recovers from the current downturn.

With sugar exports soaring, even Brazil's better-equipped ports are operating at close to full capacity. The current sugar rush looks set to be a real test of the country's infrastructure.

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