Difference between hydrated ethanol and sugar in NY hit -44% in December

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Reduction in the gap between hydrated ethanol and NY sugar occurred due to more intense losses of sugar than hydrated ethanol sugar in the physical market; A slightly stronger real against the dollar reduced the movement; More valued CBIOs also supported the reduction in the hydrated ethanol disadvantage; For January, SAFRAS & Mercado expects hydrated ethanol with an even smaller disadvantage, at -36.77%

December data on the disadvantage of hydrated ethanol sugar in the physical market against raw sugar in New York (with the current driver contract, March/24, both converted into cents per pound and placed inside mills) showed a scenario of slight reduction of the negative correlation between the biofuel and sugar in the margin compared to the immediately previous month. This happened through the combination of some key vectors.

The first of these was the more intense decline observed in New York sugar than that seen with hydrated ethanol in the physical market. While hydrated ethanol had a devaluation of 11.29% in its prices in reals per liter, sugar in New York had sharper lows, at 18.63%.

This was the pivot for the reduction of 5.22% between the 50.15% disadvantage seen in November and the slightly smaller disadvantage of 44.93% in December 2023. Furthermore, hydrated ethanol had extra support from part of the appreciation in CBIO prices in the period, which increased 1.56%, going from BRL 116.20 to BRL 118.01 in the averages between November and December. More valued CBIOs increase the remuneration of mills that produce hydrated ethanol, which account for 80% of credit issues traded on stock exchanges (the remaining 20% are issued by biodiesel mills). A brief vector opposing the reduction in the disadvantage of hydrated ethanol was the exchange rate.

From November to December, the real appreciated by 0.04% on average against the dollar, rising from BRL 4.8996 to 4.8974. As a result, the decline in hydrated ethanol of 11.29% in reals per liter increased to 11.71% when converted into cents per pound. At the other end, we had raw sugar in New York, for the March/24 position, which had its average price falling 18.63% between November and December, going from 27.31 cents to 22.22 cents. This decline, added to the discounts with elevation, in the face of FOB conversion and the effects of the exchange rate on these items, fell to 19.81%, further amplifying the negative evolution against the prices of raw sugar in New York when placed into mills.

The only support point that sugar had in its calculations was the evolution of the basis for shipping VHP sugar in Santos, which between November and December went from -0.02 to +0.05 cents. In this sense, as the influence of the basis has its limitations, it did little for the formation of sugar prices to remain in a positive scenario.

For January, SAFRAS & Mercado expects an even greater reduction in the negative spread of hydrated ethanol against sugar, from the current level of -44.93% to -36.77%, even though the correlation between them is far from being positive. This should happen due to the rise in the prices of hydrated ethanol in the physical market, which should go from an average of BRL 2.31 to 2.35 per liter. Furthermore, the dollar should have similar devaluation movements, going from BRL 4.90 to BRL 4.85, which helps the movement of less devalued relative prices for ethanol.

In the meantime, raw sugar in New York, still in the driving position occupied by March/24, is expected to have a new devaluation, going from the average of 22.22 cents to the level of 20.00 cents, prolonging the current cycle decline that this asset presents with its respective stability around 20.00 cents.

We also expect a decline in average CBIO prices from BRL 118 to BRL 113 per contract. This decline will occur due to the greater production of biodiesel and the continued increase in ethanol supply with the continuation of cane crushing in December even if in January mills reduce their cane crushing due to heavy rain during the period.