Porto Alegre, June 11th 2024 – Between April and May this year the price differential of hydrated ethanol fell 5.21%, going from -30.77% to -25.56%; The pattern of negative spread of hydrated ethanol compared to raw sugar is the lowest since April 2023, when the biofuel paid 23.71% less than sugar; Reduction in the disadvantage of hydrated ethanol has been occurring in the market since January this year when the biofuel paid 45.20% less than sugar; For June, SAFRAS & Mercado estimates an even greater reduction in the differential to -20.38%.
May was a period of significant reduction in the levels of differentials between the prices of hydrated ethanol in the physical market and raw sugar in New York, both in cents per pound and placed inside mills. This reduction in the disadvantage of hydrated ethanol is not an isolated event in May, it has been observed since January this year when it paid 45.20% less than sugar. Since then, over the past five months, hydrated ethanol sugar has already reduced its monthly average disadvantage against New York raw sugar by major levels of 19.65%, a trend that is not negligible for the market. In this sense, looking briefly from a medium-term perspective, SAFRAS & Mercado warns that this movement is likely to intensify even further, both due to the decline in raw sugar in New York and the upward trend to be observed in the prices of hydrated ethanol in the Brazilian physical market. Firstly, raw sugar in New York is expected to maintain the lower price standards that it has presented to the market since the beginning of April this year. This will occur because of the fundamentals of the new crop in Brazil’s Center-South as well as the fundamentals of the current crop, 2023/24, and the future crop, 2024/25, in Asia.
Asia has already shown production growth in its current crop in the face of rains 20% above expectations between January and April this year, which allowed for the productivity recovery in cane fields in the second half of the crushing period of the local cane crop, after a previous year marked by rainfall 6% below the historical average due to the overlap of El Niño with the 2023 Monsoon rainy season. For the 2024/25 crop, the production recovery seen in the 2023/24 season should be expanded due to rainfall 106% above the historical average. These will occur due to the overlap of La Niña with the 2024 Monsoon rainy season, which occurs between June and September, with La Niña occurring from July to September this year.
In Brazil, the current cane crop in the Center-South is expected to remain firm at 42 mln tons, even with the decline in the cane crop from 650 to 610 mln tons in the region. Therefore, in both Brazil and Asia, raw sugar prices in New York are expected to remain under negative pressure throughout the third quarter of 2024 toward the base of 18 cents and then in a direct trend toward 17 cents. In the meantime, hydrated ethanol in the Center-South should have the opposite path and head for appreciation. This will also occur due to the failure of the 2024/25 cane crop in Brazil’s Center-South.
As mills have a clear tendency to maintain their raw sugar production along the season, even in the middle of a cane crop failure, the natural discount should fall upon hydrated ethanol, which allows mills the ability to control both the supply and demand curves, through the management of competitiveness levels against gasoline. The mills’ objective is to reduce the production of hydrated ethanol to have more cane left for sugar production but, at the same time, to prevent a shortage of hydrated ethanol from occurring, by increasing sales prices to distributors to reduce levels of competitiveness and, consequently, demand. There will be a smaller supply of hydrated ethanol, but its prices will be higher, partially offsetting the revenue losses.
According to SAFRAS & Mercado, mills will also avoid cutting the supply of anhydrous ethanol for fear of generating concerns for the government when the Future Fuel Bill is passed by the Senate, which should increase the mixture of anhydrous ethanol from the current 27.5% to 30% in 2025. As a result, it is politically sensitive for the sector to allow the anhydrous ethanol supply to be reduced this year, even with the crop failure, which will increase the discount pressure on hydrated ethanol production, resulting in greater upward pressure on hydrated ethanol prices while further reducing the lag pattern in comparison to raw sugar prices in New York.
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