World Sugar and Ethanol Industry

Sugar

Sugar is a staple consumer product and essential commodity produced in various parts of the world. Sugar is primarily derived from sugarcane and sugar beet, with sugarcane accounting for 78.0% of the world’s total sugar production in the 2011/2012 harvest according to the USDA. Sugar has agricultural and industrial applications and its production is both labor and capital intensive.

Sugar Products

Sugar can be categorized into three main product categories (raw sugar, white sugar and liquid sugar). These categories are based on two principal criteria:

- Polarization: The sucrose content of sugar is measured as Polarization degrees (S or Z). As an illustration, refined sugar, which is more pure than crystal sugar has a reading of more than 99.80Z compared to 99.70Z for crystal sugar.

- Color: The color of white sugar is measured on the International Commission of Uniform Methods of Sugar Analysis scale, or the ICUMSA scale. This scale measures the purity of the sugar according to the reflection of light through the sugar crystals, with zero being the purest possible for a crystal. The ICUMSA scale ranges from 15 to 1600.

Raw Sugar

Raw sugar is a tan to brown colored, coarsely grained solid obtained on the evaporation of clarified sugarcane or sugar beet juice. It is a partially purified sugar, characterized by sucrose crystals covered with a film of molasses. Raw sugar is processed from the cane or the sugar beet at a sugar mill and usually further refined to produce white sugar for consumption. It ranges from 92Z to 99.6Z average polarization. VHP sugar is a 99.6Z raw sugar which allows a simplified process for refining (no affination).

Raw sugar is traded in U.S.$ per pound at the New York’s ICE under the contract no. 11. The Sugar No. 11 contract is the world benchmark contract for raw sugar trading. The contract prices the physical delivery of raw cane sugar, FOB, the receiver’s vessel to a port within the country of origin of the sugar. The Sugar No. 11 contract refers to raw centrifugal cane sugar based on 96Z average polarization

White Sugar

White sugar is a purified sugar whose average polarization ranges from 99.6Z to 99.9Z. White sugar is may be produced directly from sugarcane or beet; the only difference in the final product produced is in its appearance. White sugar from beet tends to be produced in slightly smaller and more uniform crystals than that from cane due to the higher purity of the beet concentrate; there is no difference in taste between the two. White sugar can also be produced indirectly from raw sugar under a refining process.

White sugar can be subdivided into two different products:

Crystal sugar. Crystal sugar is commonly used for direct human consumption in the retail market. It is also used extensively by the agro-food industry to make beverages and confectionery items. The reference price for crystal sugar is monitored in Brazil through a crystal sugar price index released by ESALQ.

Refined granulated sugar. This white sugar is obtained from crystal sugar or from VHP sugar, in order to obtain defined crystals of uniform grain size. It is a pure sugar, with no coloring, no humidity and no caking. Refined granulated sugar is commonly used to make syrups of high transparency and dry mix for the manufacture of food products such as chocolate powders, candies and soft drinks but also in pharmaceutical products—all products for which appearance, outflow and solubility are very important qualities. Refined granulated sugar is traded in U.S.$ per metric ton at London’s Euronext LIFFE, under the contract no. 5. The White Sugar Futures Contract, launched in July 1983, has become the benchmark upon which white sugar is traded. The basis of the contract is 45 ICUMSA white sugar, delivered FOB in designated ports across the world, based on 99.8 Z minimum polarization.

Liquid Sugar

Liquid sugar classification includes products that may have only a limited percentage of pure sugar or sucrose content. Liquid sugar is a natural sweetener made from sucrose and is an odorless solution, crystal clear, obtained by dissolving solid sugar in water with subsequent purification and discoloration, which ensures that the product has high transparency and clarity. In general, it has a concentration from 66.7 to 67.3% Brix. This is a product with the same flavor and sweetness profile of common solid sugar, and for these reasons, highly requested by the industries producing carbonated beverages.

The highest rate of sucrose content is found in liquid products obtained by dissolving sugar in demineralized water followed by filtration and discoloration stages to obtain perfectly pure and clean syrup. Pure and clear, this sugar syrup is used in particular in the soft drinks sector, in spirits and in syrups; it is particularly recommended for all applications with very strict coloring criteria. In contrast, amber liquid sugar is darker in color and can be used in products where brown color is desired. Isoglucose (or inverted sugar), which is obtained by the inversion of sucrose can also be diluted to obtain liquid sugar. This inverted sugar syrup is a natural sweetener obtained from the mixture of glucose, fructose and sucrose. It can be produced from acid or enzymatic inversion. It is presented in liquid form in a clear and slightly yellowish solution with characteristic odor and flavor, and high sweetening power. Glucose syrups, dextrose syrups, low fructose syrups and high maltose syrups are also liquid sugars, but they are obtained through enzymatic hydrolysis of starch and/or chemical conversions. Finally, liquid sugars can also be made from a blend of sugar, glucose and isoglucose syrups.

Sugar End Markets

Food
Sugar is the most versatile sweetener available. It is commonly used in a variety of foods because of its unique qualities, which cannot be reproduced by any other ingredient. It can be considered one of the cheapest sources of energy for humans. It is used for baked products, beverages, biscuits, soft drinks, chocolates, confectionary and dairy products.

Non-Food
The two main non-food applications of sugar are in the pharmaceutical and fermentation industries. In some applications such as fermentation, sugar has been able to partly replace hydrolysates or molasses when price arbitrage is in favor of sugar. This is notably the case in Europe where sugar for industrial uses is not limited by the sugar regime and has become competitive with other substrates.

Pharmaceuticals.
There is a significant use of sugar in the pharmaceutical industry, for example in medicated sweets, blended powders (cold and flu remedies), cough syrups, tablets and pastilles. In addition to adding sweetness to medical products to make them more palatable, sugar also provides desirable functional properties: low toxicity, high purity, ability to act as a natural preservative and ability to control the dissolving of medical products.

Fermentation.
Sugar is also used by several industries as a substrate for bacteria and other living microorganisms such as yeasts to generate organic acids and other compounds. In this respect, sugar is a starting substrate for the production of penicillin and vaccines or organic acids such as lysine. Sugar is also an alternative to hydrolysates or molasses in the production of fermentation products such as citric acid for use in beverages or detergents or for the production of enzymes.

Production and Consumption
Worldwide sugar production and consumption have increased by 15.1% and 16.1%, respectively over the last 10 years, totaling approximately 171.0 million tons and 160.2 million tons, respectively, during the 2011/2012 harvest, according to USDA. Consumption has generally outpaced production, reducing world sugar inventories.

Tonon Bioenergia believes that the consumption of sugar is likely to continue to grow due to overall population growth, increasing purchasing power of consumers in many areas of the world and increasing worldwide consumption of processed foods as a result of the widespread migration from rural to urban areas. Accordingly, Tonon Bioenergia believes the strongest future growth in per capita consumption is likely to occur in Asia, where per capita income is growing rapidly and population migration to urban centers is occurring on an accelerated basis.

Sugar Prices

The unregulated international prices of raw sugar follow the rates established by the NY11 contract. The London No. 5 White Sugar Futures Contract, or Lon 5 rate is based on the price of crystal sugar traded on LIFFE. In Brazil, domestic sugar prices are established according to free market principles. The main rate adopted in Brazil is established by ESALQ. In Brazil, domestic sugar prices generally follow international sugar prices.

Brazil, as the world’s largest sugar producer, accounting for approximately 45% of global exports, plays a key role in the establishment of world sugar prices.

Brazilian Sugar Industry

Brazil is the world’s largest producer of sugarcane for the production of ethanol and sugar. Brazil produces more than 30 million tons of sugar per harvest and more than 20 million cubic meters of ethanol.

Ethanol

The increase in oil prices over the last few years and increasing concerns with the environment have created favorable conditions for the use of renewable resources of energy such as ethanol.

Ethanol is a fuel that can be produced from sugarcane, corn and/or sugar beet. It is a clean and biodegradable fuel and its manufacturing and burning are not believed to increase the greenhouse effect. Ethanol’s high oxygen content reduces carbon monoxide emission levels emitted from the burning of gasoline, according to the United States Environmental Protection Agency. Ethanol blends also reduce emissions of hydrocarbons, a major contributor to the depletion of the ozone layer.

Environmental concerns and initiatives are raising awareness of the need to reduce world consumption of fossil-based fuels and adopt cleaner fuels, such as ethanol.

Production, exports and consumption

Currently, the United States and Brazil are the principal producers and consumers of ethanol. Most ethanol produced in the United States is made from corn, while in Brazil it is produced from sugarcane.

The growing concern for the environment and the search for cleaner and renewable sources of fuel, as well as the increase in oil prices, have led many countries to adopt, at different levels, rules regarding the obligatory addition of ethanol to gasoline.

Although the ethanol industry is also regulated and protected in several countries, Tonon Bioenergia expects to future access to the international ethanol markets to increase with the greater use of ethanol as an additive to gasoline, the recognition of its additional environmental benefits and Brazil’s competitive advantages in ethanol production.

Hydrous/raw ethanol and anhydrous ethanol are two different fuel grades of ethanol (or biofuel).

Hydrous/Raw Ethanol. Hydrous or raw ethanol is produced from the distillation of centrifuged wine obtained from the fermentation of sugar juice and molasses. In Brazil, hydrous ethanol has a minimum alcoholic content of 92.6, as determined by the Brazilian National Institute of Weights and Measures, or INPM. Hydrous ethanol is colorless and is sold directly to hydrous ethanol distributors and sent to gas stations for direct use in vehicles.

Anhydrous Ethanol. When hydrous or raw ethanol is dehydrated to reach a higher concentration of ethyl alcohol content, it is called anhydrous ethanol. In Brazil, anhydrous ethanol has a minimum alcoholic content of 99.3, as determined by INPM. Anhydrous ethanol is sold in bulk in tanks that are specially designed for the transportation of flammable products and is used as a gasoline additive and later sent to gas stations. Such ethanol is the only fuel-grade ethanol that can be used by car vehicles in Europe, because of the specifications of engines sold to European customers.

Biofuel. Biofuel is defined as fuel derived from biological materials or from the metabolic by-products of living organisms. These include wood, vegetable oils, animal fats and animal manure. By contrast, fossil fuels, such as coal and petroleum, are derived from long-dead biological materials that have been transformed by geological processes. In principle, biofuels can be obtained from any biological carbon source, but the most common sources are photosynthetic plants.

A number of agricultural crops are being grown for biofuel production, including sugarcane, wheat, corn, sugar beet, soybean and sorghum. They are known as agrofuels. The use of biofuels is expanding, as they offer several advantages over fossil fuels. For example, many biofuels are nontoxic, biodegradable and renewable. The use of biofuels reduces dependence on oil and enhances energy security. Also, unlike fossil fuels, which return carbon that was stored beneath the earth’s surface for millions of years into the atmosphere, biofuels can produce energy without causing a net increase of atmospheric carbon. This is because as new agrofuel plants are grown, they remove the same amount of carbon dioxide from the atmosphere as they will release as fuel.

Ethanol Prices

International Trade
A world ethanol market does not exist yet in the way that it does for other energy commodities. There is no liquid futures contract, worldwide or even domestically.

The low international trade level is also a consequence of large-scale domestic ethanol fuel programs, which create strong domestic markets at the expense of a strong international market. Countries that are net importers of ethanol generally arbitrate import prices as being the price at the origin plus freight and commercial tariffs.

In most importing countries, including the United States, domestic ethanol prices correlate with gasoline prices (oil prices). In Brazil, ethanol prices are generally correlated with sugar prices.

Brazilian Domestic Market
In Brazil, approximately 7% to 8% of the total ethanol production is usually exported. This makes ethanol prices less dependent on international prices (usually oil-correlated prices) and more related to domestic sugar prices. Domestic prices for hydrous, anhydrous and industrial ethanol are collected, analyzed and released on a daily, weekly and monthly basis by ESALQ, creating a valuable index which allows contracts, indexation and spot deals.