BRAZIL UPDATE — WHAT TO EXPECT
The Brazilian campaign has begun with the usual favouring of ethanol. The market completely overestimated the eﬀect of the drought last season with (realistic) estimates of a crop as low as 540 mmt giving way to the reality of ~575 mmt. This season the market is calling for slightly higher at ~585 mmt, remembering at full swing Brazil can crush around 2.5mmt per day. Given the abundant rain this season, we are fully expecting the crop to be large, even surpassing market estimates. However, due to closure of mills we see total crushing capacity of around 595 mmt. Producers with access to credit have been able to lock in levels circa 15–20% above cost of production due to the high interest rates and sugar forward curve. Ethanol demand has picked up following diﬀerent government measures and this will provide some floor for the sugar price. A weaker Reais will lower this floor. The Bureau of Meteorology in Australia has oﬃcially called an El Nino event. For Brazil this is associated with higher rainfall during the crush, although statistically the correlation is low. That is a strong El Nino event can lead to little rainfall and a weak El Nino can lead to a lot of rainfall. We expect production to move to ethanol more than last year, however the extent to which that occurs will depend on whether sugar prices remain low enough relative to ethanol for long enough to make the switch. This did not occur last year. Time will tell for Brazil and we will be watching it closely.
Sugar has remained in its 1250–1350 recent range as the market tries to digest a potential change in trend. Spec positioning has moved positive for the first time since July last year. With this part of the market back to neutral, and few catalysts in the very short term for them to continue buying we see the market struggling to go higher, and in fact we suspect the aggressive sell oﬀ seen in the later part of the week was some of this new long position being unwound. As we noted, with ethanol paying better than sugar at these levels, we expect some degree of switching to alcohol, but the key issue will be whether or not the harvesters can get into the paddocks.
We are in a situation very similar to last year where a resolution to the surplus may be around the corner but prices will need to remain at low enough levels for the switch to ethanol to occur. A rally from here (or a further weakening of the Reais) will likely just encourage more sugar to be made and the elusive deficit will be another year away. China has responded to lower world prices by cutting back production, as has Europe, but others cutting production are hard to find. Barring a crop failure/weather event, significantly higher prices seem a way oﬀ.