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"Global reliance on Center-South's sugar production, along with low stocks in key origins and weather challenges, keeps supporting the sweetener’s prices. Brazil’s sugar maximization draws strength in crystallization investments and stagnant ethanol prices. "
Ethanol prices lost correlation to the energy complex
- Bullish market sentiment and rain-related disruptions in Santos contributed to sugar prices remaining supported during the week.
- There is a consensus on Brazil's potential to supply record-high sugar volumes if weather conditions cooperate.
- Ongoing conflict in the Middle East, OPEC+ supply cuts, and reduced US strategic reserves led to a surge in crude oil prices.
- The supportive energy complex has not significantly impacted Brazil's domestic fuel market due to both the government's commitment to keeping pump prices reduced, providing stability against international volatility, and higher feedstock availability.
- Increased feedstock from cane and corn has led to an 11.5% year-on-year increase in anhydrous production, with hydrous not far behind, growing by 9% during the season, despite the max sugar behaviour.
With a rather dull week, sugar prices managed to recover their losses and stay within 27-27.6 USc/lb. The bullish tone set on the sugar week was one of the reasons behind this stability – the other was probably rains disrupting port loading in Santos. Meantime, the market seems to be reaching some consensus. The notion that the world is highly dependent on Center-South’s production, especially given lower origins stocks and weather adversity, is the first one, which keeps adding further support to the sweetener. The second one would be that Brazil does indeed have the potential to continue supplying record-high volumes, of course if the weather cooperates.
Finally, the market also agrees that Brazil should continue maximizing sugar production. As a matter of fact, many mills have invested in the crystallization process, allowing for optimistic sugar supply forecasts. On the losing side of this notion is ethanol.
Image 1: Key Origins Ending Stock
The biofuel prices continues to pay less than the sweetener and should remain doing so. Of course, the ongoing conflict between Israel and Palestine has contributed to the recent surge in the energy complex. Combined with OPEC+ strategy of cutting its supply during 2023 and a decrease in US strategic reserves, the stage was set for an uptick in crude oil and its derivatives prices.
Image 2: Impact of OPEC+ cuts on US crude oil inventories
Source: Refinitiv, hEDGEpoint
Interestingly, this global trend has not impacted the Brazilian fuel domestic market. This can be attributed to the government's commitment to reduced prices at the pump, which prevents international volatility from hitting the country abruptly.
Since the announced “end of PPI” in May 2023, ethanol prices have suffered a decoupling from international oil prices, with import parity closed for most of the period. Note that the correlation between crude oil and hydrous between January 2020 and May 2023 was 80%, while from May 2023 to this date, the relationship has not only decreased but reversed, reaching -67%.
Image 3: End of PPI and the correlation break between hydrous and oil benchmarks
Source: Bloomberg, hEDGEpoint
Therefore, even though it may react to the volatility added by the Middle East conflict, the biofuel should not surpass the sweetener. Another reason for that is the oil spillover effect that triggers an upward trend across the entire commodity board by directly affecting their production chains. Sugar is no different and, added to the availability shortage, the energy complex offers additional support to its price.
Image 4: Sugar and Ethanol Parity (USc/lb)
Source: Bloomberg, hEDGEpoint
Mind that ethanol prices are also not reacting to higher fuel demand: availability is not an issue. Although mills are maximizing sugar, ethanol production is thriving. Increase in both feedstock, cane and corn, allowed for a 11.5% Y/Y increase in anhydrous production so far, with hydrous not far behind, growing 9% during the crop. This higher volume is responsible for keeping stocks stable even with a 5.6% increase in Center South’s Otto Cycle, not giving prices any reason to react.
Sugar prices stabilized at 27-27.6 Usc/lb. Global reliance on Center-South's sugar production, along with low stocks in key origins and weather challenges, keeps supporting the sweetener’s prices. Brazil’s sugar maximization draws strength in crystallization investments and stagnant ethanol prices.
Brazil's fuel market remained stable despite recent global crude oil surges, thanks to the government's commitment to lower prices and ample stocks.
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