Porto Alegre, March 17th, 2025 – February was a period of strong reduction in the negative arbitrage in hydrated ethanol prices in the physical market (in Ribeirão Preto) when compared to raw sugar prices in New York (May/25 as the driver contract), with both placed on the PVU mode (to be withdrawn at the mill and without freight) and converted to cents per pound. Basically, the negative price ratio of hydrated ethanol went from -24.64% to -21.28% between January and February, which means that the disadvantage of hydrated ethanol against gasoline was smaller in the period.
In the previous month, SAFRAS & Mercado had already estimated a decline of 16.71% in the negative arbitrage for hydrated ethanol, which was 4.57% higher than the actual arbitrage seen in February. The reasons for this weakening of the negative relationship between hydrated ethanol and raw sugar from New York were basically two: ethanol prices and the exchange rate.
On the one hand, we had average prices for hydrated ethanol traded on the physical market with an increase in their monthly average of 2.02% when traded in reals per liter (which went from BRL 3.32 to 3.39 per liter). On the other hand, this appreciation in the biofuel prices was driven by the strengthening of the real against the dollar in the period, which rose 4.09% (with the price going from BRL 6.01 to 5.76).
It is interesting to note that the stronger the real is against the dollar, the higher the prices of hydrated ethanol will be when converted to cents per pound. Therefore, the appreciation of the real against the dollar is beneficial for the prices of hydrated ethanol when converted. In this sense, the 2.02% advantage in the prices in reals per liter of hydrated ethanol in the physical market was leveraged to gains of 6.43% when converted to cents per pound.
Hydrated ethanol only had a small vector of neutralization of force by the prices of CBIOS contracts, which between January and February showed an average decline of 0.48%. However, this reduction was narrow, bordering on stability, which is far from representing any reversal of the upward trend in hydrated ethanol prices.
On the other hand, raw sugar prices in New York were also on the rise, around 2.05%, when comparing the average of 18.90 cents in January against the average of 19.28 cents in February. Even so, when considering the “inside mill” mode, New York sugar prices ended up showing an even smaller increase, of around 1.80%. Therefore, the market saw a very advantageous price correlation for ethanol, which rose 6.43%, while sugar, despite being higher, rose by a much smaller proportion, of 1.80%.
Moreover, SAFRAS & Mercado notes that New York raw sugar was very strongly counterbalanced by export premiums at the port (in this case, Santos) for immediate shipment of VHP. In this sense, the average basis between January and February showed a decline of 18.12%, going from +0.14 to +0.12 cents. This contributed greatly to the reduction in raw sugar prices between the New York screen and the PVU mode, which changed from gains of 2.05% to a limited high of 1.80%, as mentioned previously.
For March, SAFRAS & Mercado projects this trend of negative arbitrage for hydrated ethanol will be intensified, changing from the current range of -21.88% to -17.88%. However, this will occur more due to the decline in New York raw sugar prices than to any gains in ethanol. SAFRAS & Mercado expects the average raw sugar price to decline by 4.06% on the May/25 screen in New York.
When converted to the PVU mode, this negative relationship should deepen to -6.23%. Worsening the sugar scenario, there will be an exponential weakening of 300% of the basis for immediate shipment of VHP in March, which will be -0.23 cents, against a premium of +0.12 cents seen now in February.
On the other hand, we will have hydrated ethanol practically stable, with an increase of only 0.29%, with its average going from BRL 3.39 to 3.40 per liter, based on Ribeirão Preto. However, with the dollar growing stronger against the real again, by 2.32%, rising from BRL 5.76 to BRL 5.90 between February and March, ethanol gains in the physical market will be reduced to -2.11% when placed inside the mill and converted to cents per pound.
Even so, this 2.11% decline in hydrated ethanol prices will be much smaller than the 6.23% decline that sugar is expected to show in March, culminating once again in a reduction in the negative arbitrage of hydrated ethanol against sugar, from -21.28% to -17.88% between February and March.
