Porto Alegre, March 21th, 2022 – A sharper decline in ethanol prices in the physical market ended up being the pivot for the expansion of losses even with the exchange rate compensation and the lows in New York sugar. February 2022 was a period of widening of hydrated ethanol differentials in the physical market against New York raw sugar, both compared in cents per pound weight and placed inside of mills. In January, the price difference between the two products was already negative, but still bordering on stability at -0.60%. In February, this negative vector increased sharply to -4.76% due to the sharp lows in hydrated ethanol in reals per liter in the Brazilian physical market. Between January and February, the liter of hydrated ethanol dropped from BRL 3.96 to 3.49 a liter, 11.92% lower. Even with the fall, the exchange rate ended up neutralizing much of this negativity to 6.67%. A stronger real raises ethanol prices when appraised in dollars.
Even with a decline of 11.92% in reals, reduced to -6.67% due to the appreciation of the real, with the dollar dropping from BRL 5.5303 to 5.1940, prices in cents for ethanol were unable to keep up with the moderate declines in raw sugar in New York, which changed only 3.02% from 18.46 to 17.90 cents. In addition, the fall in sugar, much milder than that of ethanol, had been mitigated to 2.60% because of the exchange rate. Therefore, we had a scenario of a net decline for ethanol of 6.67% and a net decline for sugar of 2.60%, which led to the expansion of the differentials between hydrated ethanol and New York sugar from -0.60% to -4.76%.
The current level of hydrated ethanol differentials is 11.89% above what was seen in the same month of the previous year, when the differentials were much deeper, oscillating around 16.64%. In the margin, differentials increased 4.15% over the levels of -0.60% seen in January this year. In the long term, the January differentials are briefly below what is generally observed at this time of year, staying 6.78% below the 5-year average for the same period, with premiums hovering around 2.02 %.
SAFRAS & Mercado expected that in February the comparison between hydrated ethanol and New York sugar would hover around -7.30%, down 4.76% from the effective data of -4.76% for the period. For March, SAFRAS & Mercado expects the average price in reals for hydrated ethanol to fluctuate by BRL 3.45 per liter, outside of mills. Inside of mills, it should be equivalent to BRL 2.86 a liter, based in Ribeirão Preto.
With the dollar average expected to stay at BRL 5.08, with an average price of 17.60 cents for May/22 in New York, which inside of mills should be equivalent to 16.71 cents, we can expect the maintenance of the hydrated ethanol disadvantage against NY raw sugar at the still negative range of 4.71% through the equivalence of hydrated ethanol at 15.93 cents.