sugaronline.com

The year 2011 proved exasperating in sugarcane – for every positive like the arrival of Bonsucro's sustainability certification or the Thai ‘miracle’, negatives like Brazil's record regression and India's blown bumper crop overshadowed it.

If lessons are gleaned from the past year in sugar and ethanol, they'll hopefully be that government's heavy hand in these markets has done more harm than good. Uncomplicated trade ends up being best for producers and consumers, while the EU will keep pushing its limits until the likes of Brazil, Australia and others punch the Euros in the mouth with a thorough WTO inquiry.

India had more than one opportunity in 2011 to cash in on global sugar export demand, but the ingrained indecision of Indian bureaucrats blew those chances for its cane millers. Sugaronline's editorial staff saw the writing on the wall with India's fumbled opportunity as early as June, and predicted in an August column that India's millers wouldn't get the chance to cash in on high export prices.

India's domestic sugar prices dropped by as much as 20% at times last year, to a point where they were below production costs. Mills ran the risk of not being able to pay farmers, which would have ultimately led to strikes by rural cane growers. It all could have been avoided if India embraced a bit more logic with its sugar policy.

When Indian states like Uttar Pradesh set a State Advised Price nearly 20% higher than the year prior while sugar prices had fallen year-on-year, they were dooming mills to a debt-ridden harvest, and subsequently screwing cane farmers out of payments that mills wouldn't be able to fulfill. Indian mills need to pursue a legal recourse to get SAPs reduced in 2012, and, in an ideal world, someday eliminated.

It was clear as late as August that export prices would drop near the end of 2011, and India needed to capitalise on demand for sugar before that time. As recently as the first week of December, Indian mills could still have profited US$38 per tonne over local prices if they had the freedom to export. But white sugar prices have fallen since then, and may drop further now that the EU has announced export plans, just as India was getting its act together.

What seemed apparent, at least in the short term, was that the Asian market would be served by Thailand’s bumper crop. This ‘miracle’ was enough to keep some markets that would traditionally be dependent on Brazil—whose failure was at least as miraculous as Thailand’s response—supplied in their desperate hour. At a whopping 10 million tonnes, the country’s export availability doubled. But even then, for months the Thai premium was riding at record highs because with India and Brazil out of the market, there was nowhere else to go.

Brazil's 2011/12 sugarcane crop suffered from a number of problems that were many years in the making, including infrastructure issues stemming from weak investment in past years, as well as weather-related factors like lingering drought impact from 2010.

Brazil's centre-south had crushed 488.46 million tonnes as of the end of November, down about 10% from a year ago and the country's first reduction in a decade. Sugar production there was 30.99 million tonnes at that time, down 6.2% from the year prior, and ethanol production was at 20.38 billion litres, down 18% on the year, according to UNICA.

Current ethanol prices in Brazil are now the highest they've been in 10 years. The government reduced the national mix rate of anhydrous ethanol in gasoline from 25% to 20% in August, and at year's end it couldn't estimate if or when that mix would increase again.

The government will offer special interest rates to producers and distributors that stock ethanol for the offseason, and new loans and tax rebate opportunities are coming into place that should encourage investment in expanding the cane crop, and building new greenfield mills. But forecasters appear split on whether Brazil's harvest for the coming 2012/13 season will increase at all from this historically disappointing year, or at best remain stagnant.

But even though Thailand was poised to bailout many of Brazil’s customers, who had planned to cash in on Australia’s poor crop post-floods, Thailand suffered from severe floods themselves that kept sugar from heading out to their new customers. Thankfully the floods didn’t impact the trade infrastructure as much as they could have, nor did they damage cane enough to reduce the potential for another bumper crop in 2012, but it was yet another kink in a very kinky trade year.

On a positive note, 2011 brought us the first legitimately recognised certification for sustainable sugar, and a high-profile producer and buyer to lead the way in Brazil. In June, Raizen, the Shell-Cosan JV, earned the Bonsucro certification and became producer of the world's first sustainable sugar at its Maracai mill.

With Coca-Cola the first buyer, these firms have changed the paradigm in 2011 of what can be expected in terms of sustainability in sugar production, and eliminated a wide range of excuses on how it can't be done. The fact that Bonsucro's certification is based on cold, hard metrics and has won the European Commission's approval as a voluntary scheme should help it gain steam in 2012. The next step will be getting beet sugar producers into the sustainability pursuit alongside cane sugar.

If 2011’s bumper crop at nearly 18 million tonnes is to be the trend for the future, then getting beet sustainability certification EU-wide, not just in some producers like the UK, is a must. The reform of the Common Agriculture Policy that will be the policy focus this year in Europe will mean that production quotas may be a thing of the past as soon as 2015. Farmers across Europe pushed hard in 2011 to make sure that didn’t happen until 2020, but it’s unlikely that they’ll win.

The European Commission made no friends in the sugar sector this past year with its November proposal to permit an extra 700,000 tonnes of “out-of-quota” white exports between December and July 11, 2012. This year’s bumper crop meant that even though the trade bloc suffered from prices has high EUR1,000 per tonne and consumers were pushing for imports, the market has continued to suffer from major swings. The EC went ahead and along with the extra exports approved internal trade of 400,000 tonnes of non-quota sugar for food in the EU at a reduced levy. The WTO limited Europe's sugar exports to 1.35 million tonnes for a reason, and top producers like Australia and Brazil have every right to challenge the EU's flippant approach to trade restrictions at the WTO.

Europe did offer an olive branch of sorts, allowing import tenders for raw sugar open to all non-EU origins. Foreign producers would have access to an otherwise closed market with open competition for raws, but using last year as a reference, the 700,000 tonnes in out-of-quota whites is more than twice the amount of raws likely to enter the market. It's been estimated that the EU will wind up with 65% more exports than the WTO approved.

In the past, when the EU has gone over export limits global sugar prices have dropped, negatively affecting other exporters like Brazil and Australia that play by the rules. The EU has done this before in 2009/10, when it exported 600,000 tonnes more than its WTO limit.

Brazil, Australia and Thailand made an official complaint to the WTO over that case, but didn't push for action. Will competing export markets follow through for some discipline this time?

India's blown opportunities take the prize though for 2011. Mills had been pushing their government to allow extra sugar exports since June, when it was clear that the 2010/11 season would produce 23 million tonnes, and the 2011/12 season was forecast at 5% higher. But the government wouldn't make a call on extra exports until November or December, and by then a truly great opportunity had passed for Indians to profit greatly, and possibly recycle it back into industry development.

Talks of decontrolling India's sugar industry midway through 2011 generated some smoke, but in the end no fire. After multiple meetings between the industry and key national leaders some thought at least the levy obligation and regulated release mechanism could be dropped as a first step for reform. But those issues cooled when concerns grew over export pressure.

Looking forward into 2012, there are more talks about possible reform in India as well as talk of fixing the infrastructure and old cane issues in India. In Europe, reform of the Common Agriculture Policy is picking up pace and farmers will be wary of plans to drop production quotas in 2015. If these key trends are any indication, it’s likely that 2012 will mean big changes where 2011 failed to see the light.