Porto Alegre, July 18th, 2022 – Weaker real against the dollar and sharply lower prices of the biofuel at mills bring hydrated ethanol premiums down to 0.07% in June
With the approval of tax relief measures, hydrated ethanol prices must fall further in July. With new currency devaluations, the negative spread of ethanol could be 16% on the average forecast for July. The month of June was a period of sharp decline in hydrated ethanol premiums against New York sugar, both in cents per pound, placed inside of mills and based on Ribeirão Preto. It was notable how hydrated ethanol premiums between May and June fell from +7.97% to +0.07%, practically fluctuating just above neutrality. The detail is that this happened despite the decline of 2.20% in the average price of October/22 in New York. What really happened to define such a big change in the market pattern was the 8.78% decrease in hydrated ethanol trading prices in reals per liter at mills, which changed from BRL 4.00 to 3.65 a liter.
This market movement was accentuated by the 1.85% valuation of the dollar against the real between May and June, from BRL 4.96 to 5.06. Also in May, SAFRAS & Mercado projected an average premium for hydrated ethanol of 4.43%, which ended up 4.36% above the effective data for the period. Yet, for the month of July, SAFRAS & Mercado projects a negative spread of 16.41% for hydrated ethanol against sugar in New York. As seen last month, new devaluations of hydrated ethanol in the physical market must drive the price ratio into negative territory.
SAFRAS & Mercado projects that the average prices of hydrated ethanol, based on Ribeirão Preto, must fall from BRL 3.65 to 3.10 a liter. Likewise, the real must drop even more, sending the dollar from BRL 5.06 to 5.25. In the meantime, sugar averages in New York must rise from 18.84 to 18.30 cents, culminating in an unfavorable relation for hydrated ethanol, forecast at 16% for July. Sugar in New York must go down due to the progress of the current crop in Brazil’s Center-South, whose production volumes must keep growing every week until the end of July.
In terms of exchange rate, we have new vectors for devaluation of the real against the dollar in view of the approval of constitutional amendment proposals that generate strong neutralization of tax collection in the country, which must enlarge the negative spread of hydrated ethanol against sugar. SAFRAS & Mercado estimates that it is only after August that hydrated ethanol will have a basis to rise to the point of starting to neutralize the losses that occurred in July. The 2022/23 crop must be heading towards the end of the season, thus reducing the availability of hydrated ethanol supply in the physical market. Also in this period, sugar must fall in New York with the approach of the 2022/23 crop in Asia, with production growth in India and Thailand.
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