Sugar: Breathing Without A Ventilator

Another week higher for sugar prices. It has been some time since we last saw the market this constructive. It is nothing so as to leave one too encouraged, true, but the mood has changed slightly. The first recovery sign, as it occurs normally with commodities, is when premiums begin to appreciate. Around five to six weeks ago sugar was being traded at a 10-point discount against NY and now some deals have been done at a five-point premium.

In NY, the first expiration month closed at 16.98 cents per pound, 19 points higher than the previous Friday, a behavior seen in all remaining months, which had positive variations between 13 and 29 points (3 to 6 dollars per ton).

Solid Numbers
The numbers from UNICA were considered constructive by the market. The crushing of sugar cane in the last 15 days was 44.3 million tons, 4.35% lower than the same period last year. The accumulated for the year is at 268.7 million tons. If we take the last five years, in the same accumulated period, we had already crushed an equivalent of 40.7% or 53.5% of the total crop for the year. In the average for the last 5 years, we would have 47%, if we disregard the extremes, we would still have 47% in the period. Therefore, the forecast for the crushing in the Center South this year would get to 571 million tons, a number lower than the market projections and even our own number which is still being kept at 578 million.

The total fuel consumption in the 12 months accumulated from Jul/12 to Jun/13, as per the data published by the ANP, reached a new record of 50.22 billion liters. Out of this total, 9.87 billion liters refer to hydrated ethanol and 40.35 billion liters to C gasoline (which contains anhydrous). The growth of the anhydrous in the period was only 0.39%, while gasoline grew by 7.88%. In annual terms, the growth in the fuel consumption reached 6.32% and the consumption in absolute numbers increased by 2.99 billion liters in the 12-month period.

In five years, the average growth in fuels consumption for Brazil has been 6.88%. If we project this same growth for the next five years, and assume that the consumption of C gasoline will be slightly lower (say by 5%), which will open up the space for more utilization of ethanol, we would get to the 2018/19 crop with an additional consumption in five years of 132 billion liters of ethanol (average of 26 billion liters per year), which would require at lest 720 million tons to be crushed in that crop year.

An executive from the sector says that contrary to what our calculation on our last commentary pointed to, we cannot think of greenfield assuming US$ 135 per ton of crushed sugar cane. According to him, the actual amount is much higher. The study from a bank, which covers the sugar and ethanol sector, estimates that the greenfield is at US$ 140 per ton of crushed sugar cane.

Distorted Cash Flow
The internal discrepancy of gasoline prices at the pump, without taxes, comparatively to the prices in the international prices, is more than 30 % according to the calculation of some traders in the market. It is obvious that this distortion causes an impact on the cash flow of Petrobras, which imports at a much lower price than what is being sold at the pump and the sugar and ethanol sector along with the taxpayers end up paying for this difference.

Since Dilma and her ministers are incompetent to the core, it is difficult to imagine that a positive solution such as readjustment of gasoline prices and/or a healthy and transparent policy for ethanol will be seen. If the sector is able to survive to the 2014/15 crop it will certainly be by its own merits. Competitive production costs in relation to its international counterparts, a devaluing of the real currency which leads to better return for the mills and the perspective – albeit tenuous – of a betterment in the medium to long term scenario, all are part in the construction of a picture which resembles a patient leaving the ICU, beginning to breath on his own, without the help of a ventilator.

The futures contract of hydrated ethanol at the BM&F Bovespa, to the despair of those who would like to be able to hedge their production in Volume, continues to shrink. Very few lots are being traded, showing an open position of less than 4000 contracts. The number of traded lots on a daily basis is also very small. The traders and that exchange (which has a reduced but competent team in the agricultural area) have been trying to get water out of a rock and both suffer equally by the lack of transparency in the ethanol price formation by the government. Wanting to transform the ethanol in commodity in an environment full of impediments caused by the current and former administration of the PT party, is almost a miraculous task indeed.