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Weather worries are creating headaches for a second straight year in Brazil, the world's top sugar producer and exporter, where insufficient rains are smothering hopes for the sugarcane crop.
The main growing regions of Sao Paulo and Parana states, which together account for more than 60% of Brazil's sugarcane, have seen about half as much rainfall as average since the start of February, according to Brazil's Somar Meteorologia.
"The situation here is quite critical," said Joao Guilherme Iglezias, director of agricultural operations at Agroterenas, a cane supplier to Royal Dutch Shell PLC's (RDSA) and Cosan SA's (CSAN3.BR) sugar and ethanol joint venture Raizen. "This time of year is when the cane normally grows and develops a lot, we've been missing a lot of rain, and that will definitely compromise part of the cane development for this next crop."
Concerns about Brazil's crop have sent raw-sugar futures traded in New York to their highest level in three weeks. On Wednesday, the May-delivery contract was steady at 25.62 cents a pound.
"The weather problems in the center-south (region) are beginning to bring new direction to the fundamentals," Arnaldo Correa, head of Archer Consulting in Sao Paulo, wrote in a weekly report. "It seems the market has to awaken."
Brazil's sugarcane production last year declined for the first time in a decade, sending shockwaves through the global sugar market, as Brazil accounts for some 50% of global trade in the commodity. An unusual combination of temperature variation and precipitation in early 2011 triggered sugarcane plants to flower during the harvest, consuming their sucrose content, while a series of rare winter frosts further reduced yields. Sugar futures in New York behaved erratically for most of 2011, breaking above 30 cents a pound several times and falling as low as 20 cents between rallies.
Iglezias said some sugarcane that sprouted before the frosts didn't survive, forcing the plants to reset their growth cycle.
"Now we've had less time for development and worse conditions," he said. "It's visible. A great part of these losses are unrecoverable."
Olivia Nunes, a meteorologist at Somar, said a cold front should bring good rains to Sao Paulo and Parana later this week. But with Brazil's characteristically dry winter expected to set in by late April, rainfall in coming weeks probably won't make up for February and March.
Neither Brazil's government nor leading sugarcane-industry association Unica have published forecasts for the key center-south region's 2012-13 crop, which mills should begin crushing around mid-April. Independent analysts widely expect the crop to fall somewhere between 2011-12 output, calculated by Unica at 494 million metric tons of sugarcane, and the previous year's production of 557 million tons.
Fabio Meneghin, an analyst at Brazil's Agroconsult, said better fertilization and an increase in planted acreage should allow the crop to come within the higher end of that range, notwithstanding the lack of rainfall.
"It's too early to talk about a drop," Meneghin said. "We're still considering a number closer to 540 million tons than to 520 (million)."
Another weak sugarcane crop would also be bad news for Brazilian consumers hoping for a break from high gasoline prices. About half of the country's cars have flex-fuel engines capable of running on pure sugarcane ethanol, while regular gasoline sold at the country's fueling stations contains a mandatory 20% level of ethanol blended in.
After ethanol production from the center-south's 2011-12 sugarcane crop fell 19%, the fuel became more expensive to burn than gasoline. Prices have yet to come down as Brazil's emerging economy demands more and more fuel.
-By Paul Kiernan, Dow Jones Newswires; (+55)11-3544-7074, email@example.com