Why Brazil is getting a sugar buzz

Since the start of the year, the price of sugar futures has almost doubled.

This is welcome news for Brazil, the world's largest producer of the stuff. The price spike is mainly explained by unfavorable weather -- too little rain in India and too much in Brazil. India's sugar production fell by almost half last year, turning the country from the second-biggest producer to the biggest importer.

For Brazil's big sugar companies, the timing is perfect: The credit crunch set off a wave of consolidation in an industry that had been resistant to it. The firms that have survived now have more scale and lots of cash.

Louis Dreyfus, a French commodities giant, bought Santelisa Vale, a large processor of sugar cane, in April. Santelisa had expanded fast and taken on too much debt, a common mistake in an industry that had the highest levels of investment of any industry in Brazil before the crunch. Dreyfus, which already trades sugar, soybeans and other Brazilian agricultural goods, wanted to bolster its position. At the other end of the spectrum is Copersucar, a giant co-operative that unites lots of small growers in São Paulo state.

The biggest of the lot is Cosan, which alone produces 2.5 percent of the world's sugar. Last year it bought Exxon Mobil's distribution and retailing business in Brazil to help it sell its ethanol. This year it bought Nova America, a smaller sugar company. Like many of Brazil's big companies, Cosan mixes family ownership with capital from BNDES, Brazil's government-owned development bank. And like many other Brazilian giants, it has suffered a vicious feud within the founding family over who should run the business.

Rubens Ometto Silveira Mello fought other members of his family for 10 years in Brazil's courts before winning control of Cosan. In 2007 he strengthened his grip by setting up Cosan Ltd., a company with a dual share structure that accords some of Mello's shares 10 times the voting weight of ordinary ones. To do this, he listed Cosan Ltd. on the New York Stock Exchange, since Brazil's Novo Mercado, where Cosan was listed at the time, does not allow such arrangements.

Mello, who is splendidly forthright, did not let the subsequent controversy bother him overly.

"You're pissing on sludge and you don't know what's under your feet," he once told Dilma Rousseff, one of the front-runners for next year's presidential election, during a discussion of the government's energy policy.

Ethanol: a natural hedge

Marcos Lutz, an executive at Cosan, argues that the fuss about corporate governance is a distraction. The firm is professionally managed, he insists, and it was no surprise to shareholders that Mello wanted to preserve an outsize say in the firm's strategy.

Brazil's sugar companies are lucky to have a natural hedge, in that when the sugar price is low many can produce ethanol instead. This can be consumed by motorists in the domestic market or exported for use in alcoholic drinks or other industries.

The market for ethanol has been growing at 17 percent a year, much faster than that for sugar, points out Luiz Pereira de Araújo of ETH Bioenergia, another fast-growing sugar firm. Such growth is likely to persist, thanks to increased sales of flex-fuel cars, which can run on gasoline or ethanol. What is more, the Brazilian sugar-cane growers' association is optimistic that Europe and America will eventually reduce tariffs on Brazilian ethanol.

If that happens, Brazil's growers, crushers and distillers will be even happier than they are already.