Ground to a Halt? Diverging Growth Trends in Brazil's Cane Industry

This report highlights that while the growth of the Brazilian cane industry appears to have stalled, a look beneath the surface reveals that this result is the product of two very divergent trends affecting two separate large sections of the industry. What does this tell us about the outlook for the industry?

“The two trends we have identified are self-reinforcing,” according to Andy Duff, Rabobank's Global Strategist for the sugar sector, based in São Paulo. “Robust companies find themselves in a virtuous circle, while weak companies are trapped in a vicious circle.”

To turn around the part of the industry that is in the vicious circle (i.e. those companies that are struggling, or restructuring, or in bankruptcy protection), it will take more than just a year or two of good prices. In many cases, a turnaround would require belief in some sort of structural improvement in prices or margins that would in turn encourage an injection of equity to improve capital structure, restore bankability and pave the way for investment on the back of the better margin outlook.

In the absence of any such belief, the output of these companies is likely to be eroded further over time as the vicious circle of lack of investment and declining revenues continues to squeeze margins. Any appetite to acquire and invest in such assets is likely to be limited to those cases where substantial synergy gains for the acquirer could be achieved.

Meanwhile, even for those companies currently benefitting from the uplift of the virtuous circle of solid margins and continuous investment, appetite for a new wave of investment may be limited - many of these players remain acutely conscious of how difficult the last decade has been for the industry in the wake of the euphoric boom in new capacity in the mid-2000s.

Thus, even with the prospect of a structural increase in margins, the first strategic choice of many such players would probably be investments in bolstering the cost competitiveness of existing operations, or in diversification of revenue streams (e.g. co-generation for electricity sales to the grid).

The diverging trends highlighted in the study suggest that the medium-term outlook for industry output is static to declining in the absence of any major structural changes in margin expectations. However, this should not be confused with lack of investment – continuous investment in cane renovation, regular replacing and upgrading of field machinery fleets, plus increasing expenditure on ag tech, will all continue to take place, led by better capitalised players that currently, together, mill somewhere between 140m and 300m metric tons of cane.