As the Brazilian sugar season gets under way, soaring global demand for biofuels and low sugar prices could lead to more than half the country’s cane crop being used for ethanol this year, Macquarie Bank is predicting.

But despite this diversion, world sugar prices are expected to remain on a downward trajectory for much of 2013 as supplies outpace demand.

Brazil is expected to produce a large sugar cane crop during 2013/14 - up 11% year-on-year to 590 million tonnes, according to Macquarie - which will add to the already large global sugar surplus. Because the ethanol market was tighter than sugar, so offered more attractive prices, a large proportion of the extra cane from Brazil was likely to go into ethanol production, the bank said in a report.

Commodity prices 20 April 2013

Orange juice prices have been back in the headlines recently, over concerns about possible crop losses from greening disease. But it is the price of apple juice concentrate that has made it into our tracker of key commodity risers this week.

Prices have increased by 7.1% to £1,354.7/tonne over the past 12 months, and a further 3.6% month-on-month. Growing consumer demand for fruit juice in emerging markets, particularly Asia, is a key driver behind firm prices, as is tighter supply from major apple producers such as China.

As referenced above, world sugar prices keep falling due to abundant supplies and weak global demand, falling by 14.3% year-on-year and down 4.4% month-on-month to £323/tonne.

“We are expecting a 54% share of the cane crop to go to ethanol,” it said. “The remaining 46% will go to sugar - a big drop from the near 50% we saw in 2012/13, when sugar prices were at a premium to ethanol for much of the crushing season.”

Rising petrol prices were driving up demand for ethanol in Europe and the US and pushing prices higher than the equivalent sugar prices, the bank said. Ethanol also tended to pay faster than sugar, Macquarie added, making ethanol production an attractive option to cash-strapped processors.

Macquarie is expecting both sugar and ethanol prices to initially fall towards the end of the second quarter of 2013, as new-season supply from Brazil floods the market, but ethanol prices will then rise again during the third quarter. At the same time, the large global sugar surplus meant sugar prices would continue to fall beyond the second quarter, Macquarie said: “The path of least resistance for sugar prices is to fall until such a point that it will signal producers to stop producing sugar.”