December 5, 2017 / 1:20 PM / a month ago

UPDATE 1-Dreyfus sugar unit sees smaller Brazil crop, higher ethanol demand

(Adds comments from CEO, context)

By Marcelo Teixeira

SAO PAULO, Dec 5 (Reuters) - Brazil’s Biosev, the sugar and ethanol unit controlled by commodities trader Louis Dreyfus, said on Tuesday it expects a smaller cane crop in the country’s center-south region in 2018/19 at 586 million tonnes, down from 599 million tonnes in 2017/18.

Mills in general have reduced renovation of cane fields and cut crop care to reduce costs, leading the company to estimate a smaller crop next season, Biosev’s Chief Executive Rui Chammas told reporters after a presentation to investors.

“We have also seen some companies idle mills. We suspended production at one plant, Raízen shut two others, Renuka fired a lot of people and might not operate next year,” Chammas said. Those closings will reduce crushing capacity in the region.

He added that Biosev, which is the world’s second largest cane processor behind Raízen, opted to increase cost cutting earlier this year to prepare for a market with possibly very low sugar prices.

But changes in oil prices and a new policy by Brazil’s Petrobras to adjust gasoline in line with international values improved prospects for local ethanol sales, which tend to lead to high global sugar prices, Chammas said.

Biosev expects that rising oil and gasoline prices and the recovery of the Brazilian economy should boost demand for cheaper ethanol in coming months. Both fuels compete for the driver’s preference at the pumps, since most cars in Brazil can run with either fuel.

It also sees passage in Brazil’s lower house of a proposal to boost biofuels use as positive.

Chammas said the company is actively following gasoline futures in the United States as a way to adjust its strategy for ethanol in Brazil. He thinks in the near future it might be possible for mills to hedge their ethanol sales using gasoline futures, when it becomes clear that Petrobras will keep its current policy of closely following the global oil market.

Brazil’s center-south is finishing the harvest of a crop that will likely be smaller than the previous season. Most analysts expect a new reduction of total volume next year due to mostly unfavorable weather and ageing cane fields. (Reporting by Marcelo Teixeira; editing by Jason Neely and Chizu Nomiyama)

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