Bullish movements were present in the last month of 2021, but the pattern of gains is still shorter
Despite the saturation of short-term gains, incentives to India’s ethanol market tend to keep prices consistently near the pattern of 19-20 cents in 2022. Last December was a period of saturation of recent gains of the average trading price of raw sugar in New York. On the one hand, it even managed to maintain a pattern of annual growth in the range of 30%, which was observed during the fourth quarter of the year. Despite this, this pattern, by itself, was already below the level of earnings between 45% and 60% observed in the second and third quarters of 2021. Besides, a decline of more than 3% in the margin in December sealed the bullish saturation pattern seen in the market since early October.
The arrival of the new crop from Asia (see India and Thailand) together with a rainy off-season in Brazil’s Center-South, are behind this pattern of negative growth observed for average sugar prices in New York. However, from January 2022 onwards, there must be two dichotomous forces in a clear arm-wrestling from the perspective of fundamentals. On the one hand, the already known trend of recovery (since August 2021) of the 2022/23 crop in Brazil’s Center-South. Still in August, SAFRAS & Mercado estimated a supply of 540 mln tons which, later in early December, was raised to 560 mln tons of cane due to a rainy off-season in the region.
On the other hand, we have a strong and unprecedented incentive for the ethanol market in India, which must reduce a considerable supply of sugar in the country. India recently approved a proposal to achieve a 20% blend of ethanol with gasoline until 2025, five years ahead of its previous target. Moreover, the achievement of the target of 8% in the blend of anhydrous ethanol with gasoline in the previous 2020/21 crop encouraged the government, which raised the target for the current 2021/22 season to 10%. Complementing the supportive measures, the government also reduced the tax on the anhydrous ethanol blend in gasoline from 15% to 5%, reinforcing the averages of the sector. Indian Sugar Mills Association (ISMA) indicates that in the last 2019/20 crop, mills in India employed 800,000 tons of sugar to produce ethanol. In the 2020/21 crop, this volume jumped to 2.1 mln tons. For the 2021/22 crop, ISMA estimates that 3.4 mln tons will have to be diverted. The target for the 2023/24 season reaches 6 mln tons.
In this context, in December, the average closing price of the March/22 contract on the New York exchange was 19.22 cents. In comparison with the same month of the previous year, there was an increase of 31.04% over the average of 14.67 cents. In the margin, there was a devaluation of 3.24%, contrasting with the increase of 1.17% seen in the previous month, when we compare it with the trading average of 19.86 cents in November. Expanding the analysis perspective, we can see that the average price of December last year was 30.13% above the average price for the period for the last five years, which is currently around 14.77 cents.
In the previous month, current prices had been 32.01% higher than the five-year average for the period, which until then had fluctuated by 15.05 cents. For the month of December, SAFRAS & Mercado expected prices around 19.00 cents, which was 1.14% below the effective average price of 19.22 cents for the period. For the month of January, SAFRAS & Mercado expects prices to be around 19.30 cents, which must mean an annual increase of 20%, an advance in the margin of 0.4%, and 30% gains over the average price for the last five years in the same period.