Hydrous ethanol premium over raw sugar in Brazil climbs to record, could spur higher ethanol mix

19.01.2018

The premium for hydrous ethanol over raw sugar in Brazilian Center-South, the world's largest sugarcane producer, climbed Thursday to the highest level since S&P Global Platts started assessing the two market simultaneously almost four years ago, boosted by a strong ethanol cash market in Brazil and falling sugar international prices.

Sources said hydrous' large advantage over raw sugar can reinforce plans by local mills to prioritize t he biofuel's production in the 2018-19 crop, which will start in less than two months.

Platts assessed hydrous ethanol ex-mill prices in raw sugar equivalent at 17.58 cents/lb Thursday, while the front month ICE sugar futures settled at 13.03 cents/lb, leaving the spread between the two prices at 4.50 cents/lb, up from 4.25 cents/lb Wednesday.

The spread broke the 4-cent mark on Tuesday, for the first time since Platts launched the Center-South domestic ethanol price assessments in April 2014.

In recent days, hydrous prices have been climbing due to tight supply during the intercrop period in CS Brazil, while raw sugar futures melted down, pressured by bearish fundamentals and technical selling. A stronger real has also helped to increase hydrous value in US dollars.

Center-South mills will begin crushing the 2018-19 season officially on April 1, and plans for the production strategy are being currently discussed.

"We already know this will be a season with a lot of focus on ethanol production. But given the current spread between sugar and ethanol, we are already reviewing our plans for higher ethanol storage capacity, even if we will have to stock it outside our facilities," a trade source at a major sugarcane group said Thursday.

Brazilian sugarcane producers have long seen ethanol production as the best way to use sugar produced in years of lower international prices or when liquidity was needed to guarantee enough cash flow during financial crisis.

"In conditions like the ones we see now, mills are discouraged to take position in the futures market. They prefer to stay 'local' and sell ethanol on the spot market," said a Sao Paulo-based ethanol broker.

The estimate for the next crop in Center South Brazil -- April 2018-March 2019 -- is that 55% of the sugar cane will be directed towards ethanol, up from 53.07% in the current season, according to the latest projections by Kingsman, the agricultural analysis unit of S&P Global Platts.

However, with a smaller sugarcane crop projected at 580 million mt, down from 594 million mt in 2017-18 due to the aging of the cane fields and lower productivity, this means that the overall sugarcane ethanol production for the 2018-19 season will actually be slightly lower at a total of 25.03 billion liters, down from 25.30 billion liters in the 2017-18 season.


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