Analysts raise sugar mix estimates in Center-South
Brazilian industry flexible on sugar or ethanol
Currency moves, oil prices are factors
Sao Paulo —
In the last two years, Brazil has lowered its sugar production as the global sugar surplus capped international prices and as a supportive ethanol market paid higher premiums over raw sugar exports.
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But after three years of the surplus weighing on prices, signs of a price recovery are on the horizon for the 2020-21 crop cycle.
Market analysts are raising sugar mix estimates for the next Center-South crop cycle starting in April 2020. S&P Global Platts Analytics expects the 2020-21 sugar mix in Center-South Brazil to reach 35.5% from 34.41% in the 2019-20 crop year. London-based trading house Sopex has moved up its estimated sugar mix for the 2020-21 crop to 37% from 34.1% for 2019-20.
The majority of market participants expect the volume of sugar cane crushed in 2020-21 to be similar to the nearly 595 million mt expected to be the final figure for 2019-20.
“There is an upside trend in the cane crush [if] the weather proves to be favorable in the first quarter of 2020,” said Rodrigo Bermejo, trading intelligence specialist at Alvean, one of the world’s largest sugar-trading houses.
Market estimates are pointing to a global deficit crop in the 2019-20 season — Platts Analytics has raised the 2019-20 global deficit by 605,000 mtrv to 6.765 million mtrv, the first significant deficit since global crop cycle 2015-16. Also, the expected surplus for 2020-21 dropped 396,000 mtrv to just 124,000 mtrv.
This new fundamental picture has triggered the possibility of Brazil producing more sugar than initially estimated. An uptick seen in the NY11 sugar futures market — which has hovered over 13 cents/lb since December 4 — and the devaluation of the Brazilian real against the US dollar have added support.
Platts found a consensus among the majority of sugar traders that 35%, or 10 million mt, of the 2020-21 Brazilian sugar crop was fixed until November, meaning that producers used the NY11 sugar future contract to lock their margins for export. If that scenario proves to be right, an initial sugar mix estimated at 35% for the next Center-South crop would still be enough to commit with that volume.
TO FIX OR NOT TO FIX?
The main question in the last two crops has been whether to fix positions in the sugar future contracts to guarantee a locked margin or buy the flexibility to be able to shift the sugar mix according to the spot market. And that is again the big question in the 2020-21 Center-South crop cycle (April 2020-March 2021).
Brazilian producers can drive more sugar cane toward sugar or ethanol production, depending on which pays better. The Brazilian industry is streamlined and can set the final mix at the last minute before the crop start in April.
The sugar price in the international market, converted to real equivalent, has encouraged some producers to direct more cane toward sugar in the next crop.
The real hit an intraday low of 4.2691 to the US dollar November 26, the lowest nominal exchange rate since the real’s creation. That same day the front-month NY11 sugar futures contract settled at 12.78 cents/lb. Brazilian producers could have fixed sugar at Real 1.202/mt. By December 12, the July 2020 NY11 sugar futures contract settled at 13.65 cents/lb and the real closed at 4.0978, suggesting that for the peak of the CS crop, Brazilian sugar could be fixed at Real 1.233/mt.
The math is not that easy or obvious, however, as the ethanol outlook for 2020 is also constructive and any devaluation of the Brazilian real against the US dollar could also mean a higher gasoline price and consequently move up the hydrous ethanol price celling.
EFFECT OF HIGHER CRUDE PRICES
Producers might favor the faster cash liquidity that ethanol offers, which has been key for many mills still facing financial constraints and counting on selling ethanol quickly to meet monthly payments.
Sources were not considering any additional value coming from new carbon credit program Renovabio, which officially starts December 24, as how the program will work is still unclear.
“We expect to be able to sell CBIOs just in the second half of 2020 and therefore we are not counting on it to decide our sugar mix,” an ethanol trader from a Sao Paulo-based mill said.
ADVANTAGE FOR BRAZILIAN PRODUCERS
Brazilian sugar producers maintain an advantage over competition in India and Thailand thanks to the ability to react to price movements in the international sugar market while extracting value from ethanol.
If the NY11 sugar futures contract reaches 14 cents/lb, Brazilian and Thai producers are expected to fix future contracts to lock margins for a huge amount of sugar, leading to the futures contract melting as fast as it has been surging, and ethanol again could appear as the best option for the Center-South industry.
For 2020, the world sugar market might not be flooded by Brazilian sugar as any more volume could dramatically shift a sensible and well-stocked international market.
— Nicolle Monteiro de Castro, firstname.lastname@example.org
— Edited by Bill Montgomery, email@example.com