Brazil switch to ethanol to drive sugar prices higher, say cane crushers


Two of Brazil’s largest cane crushers offered hope to sugar bulls, citing a dent to supply expectations in the producing from a swing by mill to producing more ethanol instead of sweetener.

Sao Martinho, while acknowledging that the “market consensus is for a surplus of 5m-6m tonnes” in world sugar output in 2018-19, said that such expectations could prove too large, given the incentive to mills to focus on ethanol, in the face of better returns from the biofuel than the sweetener.

“We believe the crop year starting in April 2018 in the Centre South region of Brazil may shift the consensus to a lower [world sugar output] surplus, since a large portion of the production mix may be allocated to ethanol production,” the group said.

Sao Martinho itself reported a drop to 47% in the proportion of cane its processing operations turned into sugar in the October-to-December period, down from 52% a year before.

‘As much ethanol as we can’

Separately, rival Biosev, controlled by ag trading giant Louis Dreyfus, said that the Centre South, for which this season’s sugar production is broadly seen at about 35m-36m tonnes, may see sugar supplies fall some 4m-5m tonnes in the 2018-19 crushing season, starting in April.

Assuming that mills maximised ethanol output over sugar, “we would be reducing the amount of sugar for export to the tune of 4m-5m tonnes, which could have a relevant impact in the supply/demand balance when compared to this year”, Rui Chammas, the Biosev chief executive, said.

“Market conditions, as they are for future ethanol and sugar, based on what we see today, indicate that the Brazilian crop will lean much to alcohol [ethanol],” he said.

“We intend to produce as much alcohol or ethanol as we can.” Biosev in the October-to-December period turned 39.8% of its cane into sugar, compared with 47.8% a year before.

‘Unprecedented discount’

On prices, Mr Chammas added: “I believe that the international market, as they realise the Brazilian crop leaning towards alcohol, they’ll perhaps perceive that there will be a higher offer of sugar,” in price terms, “which will lead the market to react in terms of prices”.

And the assessment found some support from analysts at broker BTG Pactual, restating a “buy” recommendation on Sao Martinho shares, with a target price o R$24.

“With sugar selling at an unprecedented 30% discount to ethanol, we expect Brazilian mills to shift away from sugar, and strongly reduce the expected global surplus from April on, eventually forcing sugar prices towards their ethanol anchor at circa 16-17 cents a pound,” BTG Pactual said.

“Moreover, we don’t expect ethanol prices to pull back much during the crop season, as higher gasoline/oil prices should provide support to local ethanol demand.”

New York raw sugar futures for March stood up 0.8% at 13.69 cents a pound in late deals.

Sugar vs ethanol

Both cane processing groups attributed the 2017-18 world sugar output surplus in particular to output by northern hemisphere producers - according to Sao Martinho “especially by India, Thailand and the European Union”.

Biosev – stating that “favourable weather conditions in India, Thailand and Europe resulted in high cane yields – sad that the “surplus is mainly due to the expectation of higher supply from certain producing regions, such as India, Thailand, Europe and China”

Brazilian ethanol prices, by contrast, have been underpinned by rising values of rival gasoline, by tax changes favouring the biofuel, and by curbs on imports.

“Imports decreased from 345,300 cubic metres in the third quarter of 2017 to 289,600 cubic metres in in the third quarter of 2018, mainly due to the duties that weighed on imports of corn-based US ethanol by reducing the product’s competitiveness,” Biosev said.

Share prices

The comments came as the groups unveiled results for the October-to-December period, in which Biosev reported a fall into a R$278.9m ($84.5m) loss, compared with earnings of R$42.8m a year before.

While revenues rose by 2.8% to R$1.68bn, the group revealed a R$238m hit from currency volatility.

Sao Martinho reported a trebling in earnings for the quarter to R$168.5m, on revenues up 22%, helped by higher selling prices and volumes, following a larger cane crush.

Sao Martinho shares stood 1.3% lower at R$18.13 in afternoon deals in Sao Paulo, where Biosev shares dropped 4.4% to R$4.16 – earlier touching an all-time low of R$4.07.


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