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Brazilian mills’ credit crunch fuels sugar prices

The rally in raw sugar prices has been exacerbated by diminished forward selling from Brazil, the world’s largest exporter, as some producers there have seen their credit lines for trading severely restricted, traders and local executives said.

Prices of raw sugar in New York rallied this week to a 3-year high of 16.03 cents per pound, up about 35 per cent so far this year, boosted by a crop failure in India, the world’s largest consumer. ICE July sugar was on Thursday flat at 15.40 cents.

Traders said that in normal circumstances, Brazilian companies forward selling – or hedging – should have capped the rally triggered by India’s hefty imports and speculative buying. However, hedging was weak as many producers from Brazil, the world’s largest exporter, lacked credit lines to finance their margins.

Participants in the futures markets have to post an initial deposit, or margin, for each trade. In addition, if the market moves against their position, they will receive a margin call – a request to put up more collateral.

“Relative to historic levels, we are seeing a massive restriction on the selling side of the sugar market,” said Toby Cohen, at London-based sugar merchant Czarnikow, echoing a view widely held by other participants in the sugar market.

“When mills need all available capital to keep the business running, hedging becomes a luxury.”

Sugar dealers said the problem was not widespread, however. Larger Brazilian groups, such as Cosan SA Industria & Comercio, were operating almost normally, but added that other smaller mills were struggling.

Manoel Fernando Garcia, president of S/A Fluxo, one of the biggest sugar traders in Brazil, said credit lines used to finance futures contracts had been cut drastically compared with the level of the last two years. “I can’t say if it’s 60 per cent or 80 per cent, but it’s considerably more than 50 per cent,” he told the Financial Times.

Mr Garcia said Brazilian sugar producers were “extremely anxious” to take advantage of today’s high prices to hedge sugar contracts for delivery in October 2009 and March 2010, but their ability to do so had been severely curtailed.

“To fix contracts for October or March delivery, I would have to have credit lines to cover margin calls as prices go on rising,” he said. “But the banks are being extremely cautious and we just don’t have the lines,” Mr Garcia added.

Brazil’s capital-intensive sugar industry, which leveraged its expansion on cheap debt, has suffered under the weight of the current credit crunch and low prices for most of 2007 and early last year. Five sugar companies with about 1m tonnes of production – about 4 per cent of the country’s exports – have applied for “judicial recuperation”, the Brazilian form of US Chapter 11 bankruptcy protection.

Jonathan Kingsman, of Lausanne-based Kingsman SA sugar consultancy, said that credit both to trade and to expand was no longer available to the Brazilian sugar mills as it was when the industry was growing rapidly in the early 2000s.

In spite of all its problems, Brazil is set for a record sugar crop this season of 36.4-37.9m tonnes, up from last season’s 31.6m tonnes, official figures show.

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