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Commodities 2022: Brazilian sugar production supported by strong market fundamentals

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Commodities 2022: Brazilian sugar production supported by strong market fundamentals

Highlights

Sugar to keep paying a wide premium over hydrous domestic

Despite positive rainfall outlook sugarcane crushing to increase 5.77%

Hydrous price in raw sugar equivalent to be a key metric

Brazilian sugarcane producers are expected to keep favoring sugar production over ethanol in the Center-South crop that starts on April 2022, taking advantage of the positive premium paid in the sugar export market over hydrous ethanol in the domestic market.

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This same production pattern has been observed since the crop 2020-21, when sugar in the export market paid an average premium of $55.6/mt over hydrous ethanol in the domestic market.

A combination of sugar fundamentals, pointing to a second consecutive deficit in the sugar global season (September – October) and international oil prices trending lower can be considered the main highlights focused on by Brazilian sugar producers while drawing their sugar production strategy for 2022.

S&P Global Platts analytics estimates a deficit in the supply and demand for the global 2021-22 crop of 1.485 million mt, although this is down from 3.719 million mt in 2020-21. Global production in 2021-22 is expected to increase by 4.633 million mt on the year to 183.380 million mt, thanks mainly to sharp rebounds in production in Thailand and EU.

However, this will not be enough to balance the global sugar market. Despite all the negative global impacts after the two years of COVID-19, sugar consumption is expected to increase by 1.3% on the year in 2021-22 to 184.865 million mt, which if confirmed will be the highest yearly growth since 2015-16, as demand slowly recovers from the impact of the global pandemic.

Looking deeply into the largest Brazilian producing region of CS Brazil, the rainfall forecast shows a positive outlook for the first quarter of 2022, with precipitation moderately below-normal volumes mainly for north Sao Paulo and Minas Gerais. In that scenario, Platts Analytics estimates a recovery on the cane crop with agriculture yields increasing by close to 7%.

Total cane crop is estimated at around 550 million mt, up from the estimated 520 million mt on the current crop 2021-22. This translates to total sugar production of 33.7 million mt, up 1.63 million tons from the estimated 32.07 million mt to be reached on March 31, 2022.

Explore this topic: Commodities 2022

International oil price

Oil prices trending lower are being reflected in gasoline prices, and according to Petrobras' import parity pricing policy, gasoline prices in Brazil should also see downward pressure. Thus, hydrous ethanol prices, which have already been on a downtrend since November 2021, will likely decline further.

From the total Brazilian light fuel vehicle fleet, more than 88% is composed by flex-fuel cars, meaning that drivers can mostly fill their tanks with E100 hydrous ethanol or gasoline, depending on the cost impact of each one.

Consumers generally fill their tanks with E100 only when its price is 70% or less than the gasoline price, due to hydrous' lower energy content.

Considering the price correlation between gasoline and hydrous ethanol, and that Brazil mostly follows the import parity price as a mechanism to settle gasoline ex-refinery prices, any change in the international oil market or in the Real currency against the US dollar will be converted in an equivalent movement in the hydrous ethanol price.

The change in hydrous prices during the 2022-23 CS Brazil crop will depend a lot on how USD/BRL behaves in an election year and the oil/gasoline prices. On a deficit sugar S&D, sugar prices will need to be at least at a 100-point premium to ethanol to ensure sugar production is favored. The hydrous price in raw sugar equivalent will be the key metric monitored once the crushing kicks off in April.