In February, the average advantage of hydrated ethanol in the Brazilian physical market compared to New York sugar, in cents per pound, inside of mills (price measure of the driver contract of the New York exchange), was 4.15 %, down 7.11% from the immediately previous month, as in January the biofuel paid 11.86% more than New York sugar.
The decrease of just over 7 points from January to February was also in line with the oscillation from December to January, which hit 6%. Basically, the market had a strong devaluation of the real against the dollar and appreciation of sugar, which together overlapped the advances of hydrated ethanol in the same period, resulting in a scenario of gains for ethanol, but such advances still clearly below the pattern that was being observed since June last year, when, until then, arbitrage premiums oscillated around almost 21% at the best moments and almost 12% in the most unfavorable periods.
SAFRAS & Mercado warns that for March the advantage of hydrated ethanol over sugar will likely keep falling due to moments of sharp lows in hydrated ethanol negotiations in the physical market along with important declines in the real, with the dollar settling around BRL 5.00, which negatively impacts prices in dollars when converted into cents per pound. It is important to remember that these arbitrage calculations do not include the 4.05% polarization differential or the basis premium in Santos.
Still in January, SAFRAS & Mercado already warned of the tendency towards a reduction in arbitrage premiums in the wake of the expectation of a decline in ethanol prices due to the proximity of the arrival of the new 2020/21 crop in the Center-South, which was already being brought forward by nearly 10% of the region’s production units. However, since then, not only this factor has contributed to strengthening the downward trend for premiums in March. Now we have the new crude and exchange rate crises that have caused many changes in the parameters for calculating arbitrage.
If, on the one hand, we have the positive pressure on arbitrage coming from the accumulated lows for sugar, which went from the level of USD/cents 15.00 to 10.50 in a single month (with an average accumulated decline of 30%), on the other hand, we have movements of the same proportion observed in the trading prices of hydrated ethanol in the physical market, which fell from BRL 2.60 to 2.10 a liter (average accumulated decrease of -19%). Of course, sugar losses look greater, but we should not forget that the real also goes through devaluation, with the dollar escalating from the average of BRL 4.35 to the minimum level of BRL 5.00 in March (+14.94 %), creating a scenario of strong volatility of negative pressure on hydrated ethanol arbitrage premiums.
Analyzing the month of February and looking at each day individually, we can find moments of differentials at -3.97% (on February 12) and maximum premiums at 7.54%, registered on February 5. The average monthly value of hydrated ethanol at BRL 2.57, discounting 12% of ICMS in São Paulo and BRL 1.309 of PIS/Cofins and converted into US cents per pound, with an average dollar at BRL 4.3514 in the period, was equivalent to USD/cents 13.85, down 1.53% from the average of USD/cents 14.06 observed for this asset compared to the immediately previous month, already with discounts on freight, elevation and FOB conversion. Over the year, the February average for hydrated ethanol in cents per pound posted gains of 6.02%, against USD/cents 13.06 in February last year. On the 2020 average, the equivalent price of hydrated ethanol inside of mills fluctuates by USD/cents 13.96, a value 10.67% above the average of USD/cents 12.60 accumulated during the same moment of the previous year.
In a very summarized way, we can interpret that, in the margin, the appreciation of hydrated ethanol in reals (+3.00%) was reduced to losses of -1.53% due to the devaluation of the real against the dollar in the period (4.79%). Besides, the arbitrage premiums had an extra negative pressure with the sugar high in New York in the same period (+4.67%), which inside of mills was increased to (+5.63%) due to the movement of decline of the real against the dollar, which resulted in a positive arbitrage of 4.15% for hydrated ethanol inside of mills.
This February premium level was 12.19% below the same time in the previous year, when, until then, hydrated ethanol was 16.35% more profitable for mills than New York sugar. Given the historical 5-year average for the same period, we have losses of 7.41% from a standard premium of 11.56% usually seen for this time of year. The 5-year average itself advanced 2.5% in the period, going from 9.06% to 11.56% between January and February, considering the most recent data.
SAFRAS & Mercado’s expectation for February was that the advantage of hydrated ethanol over New York sugar would fluctuate by 3.12%, staying 1.03% below the official data for the period. For March, SAFRAS & Mercado expects that the average price in reals for hydrated ethanol will fluctuate by BRL 2.25 per liter, outside of mills.
Inside of mills, the average must oscillate around BRL 1.85 a liter in Ribeirão Preto. With an expected average dollar of BRL 4.98 and an average price of USD/cents 11.80 for May/20 in New York (which, inside of mills, must be equivalent to USD/cents 10.39), we may have a reduction of the advantage between hydrated ethanol and New York raw sugar to a still positive level of 1.13%.