Brazilian Center-South 2020-21 sugarcane crop year kicks off with further lows for sugar, ethanol

Santos — The key Brazilian Center-South region's 2020-21 sugarcane crop year officially started Wednesday and the combined sugar and ethanol pricing environment has never been worse for producers.

The ICE NY11 May sugar futures contract (K) settled at 10.04 cents/lb, the lowest settlement for the front-month contract since September 26, 2018 when it closed at 9.90 cents/lb. By that time during the 2018-19 crop, Brazilian producers were maximizing their hydrous ethanol production, which was paying 341 points more in the domestic market than raw sugar exports.

If there is one positive currently for Brazilian producers, it would be the steep depreciation of the Real against the US dollar, with the exchange rate plunging from Real 4.0258/$ on January 1 to Real 5.2590/$1 on Wednesday, and the consequent higher price floor for sugar exports when converted into Reals.

While in the first quarter of 2019, raw sugar exports when converted into Reals averaged Real 1,057/mt, in the same period of 2020 that price jumped 26.3% to an average of Real 1,335/mt, or Real 300/mt more than production cost, according to analysts' estimates.

Some producers could have captured even higher prices by hedging their sugar exports when the combination of the ICE NY11 sugar futures contract and exchange rate was still more attractive. On February 12, the equivalent price touched Real 1,513/mt.

While sugar production could bode well for many Brazilian exporters, the domestic hydrous ethanol domestic price has been posting record lows on a daily basis.

S&P Global Platts assessed hydrous ethanol ex-mill Ribeirao Preto at Real 1,600/cu m, the lowest assessed price since July 18, 2017.

If Brazil's ICMS, PIS and Cofins taxes were deducted, the ex-mill price equivalent would drop to Real 1,277/cu m, or Real 143/cu m less than analysts' estimate of the production cost.

Mills who need to increase their cash flow to meet their payroll needs do not have the option of storing away the initial share of the crop and waiting for more typical fuel consumption to resume, which the majority of fuel distributors estimate will start to happen in May.

"There is no rationality in the sales strategy right now. It is all about desperation," said a Sindicom member, noting that mills were lowering their offers on a daily basis in an effort to capture some buyers' interest.

Platts assessed hydrous ethanol converted in raw sugar equivalent at 7.98 cents/lb, the lowest value since Platts launched the assessment in April 2014. And despite the decline by the sugar futures contract, the sweetener was paying 206 points more than the biofuel in the domestic market.

After two consecutive years in which the Center-South sugarcane industry maximized its ethanol production, a reversal might be on the cards for the 2020-21 crop.

Analysts estimate the sugarcane crush that will be converted to sugar could reach as much as 48% of the total or 14 percentage points more than for 2019-20 crop.