Hydrated ethanol reduces differentials against sugar in October


    Porto Alegre, November 22th, 2021 – Sugar in New York also dropped in October, helping to reduce the difference between the biofuel and demerara sugar in New York. If not for the exchange rate, the vector would have been positive, having premiums instead of differentials. The end of October brought with it an important inflection of gains in prices in reals per liter of hydrated ethanol in the physical market, while raw sugar prices in New York showed a moderate downward movement. Given the intensity of the biofuel gains, an inversion in the final average of the period from premium to differential was expected.

     However, in the middle of this process, the real devalued against the dollar, which ended up bringing down the prices in dollar of ethanol. The result was that, at the end of the month, the negative vector for the biofuel was maintained, albeit reduced to half by dropping from -3.72% on the September average to -1.65% on the October average.

    On the other hand, in the daily price evolution, since October 18 the price ratio of hydrated ethanol had already been positive against sugar when assessing in cents a pound inside of mills. Albeit in marginal proportions, with gains of only 0.09%, the advantage was already in favor of the biofuel since the beginning of the second half of the month. From that day onwards, the peak of hydrated ethanol gains over New York sugar reached 8.81% on October 27.

     SAFRAS & Mercado warns about the strong upward trend for hydrated ethanol premiums in November. This is because the biofuel is likely to continue strengthening in the physical market at the same time that sugar must maintain its negative vector in the international market due to fundamental vectors in Asia. Only the exchange rate must remain as a limiting vector for hydrous gains in November, similarly to October, with new perspectives of devaluation of the real against the dollar.

    Looking at the details, first there were strong gains of hydrated ethanol in reals per liter, which advanced 6.58% from September to October. This appreciation in domestic prices was strongly neutralized by the exchange rate with the 5.12% devaluation of the real against the dollar in the period, having changed from BRL 5.2576 to 5.5268 between September and October. With the devaluation of the real, hydrated ethanol gains were almost completely neutralized, going from 6.58% in reals to 1.62% in cents. After that, we still had a marginal retreat of sugar, which devalued 0.64% in New York, from 19.74 to 19.61 cents, which, placed inside of mills, resulted in a decrease of 0. 47% [each of these vectors is explained in a specific report by SAFRAS & Mercado]. The monthly average value of hydrated ethanol at BRL 4.20, minus 13.3% of ICMS from São Paulo and BRL 1,309 from PIS/Cofins and converted into cents per pound, with an average dollar at BRL 5 .5268 in the period, equals 17.97 cents, down 1.65% from the average of 18.28 cents observed for raw sugar in New York, already with the discounts of freight, elevation and FOB conversion. Year over year, the October average of hydrated ethanol in cents a pound presented gains of 79.94% against the level of 9.98 cents in October last year. On the 2021 average, the equivalent price of hydrated ethanol inside of mills hovers around 15.13 cents, up 53.34% from the average of 9.87 cents accumulated during the same period of the previous year.

    The expectation of SAFRAS & Mercado for October was that hydrated ethanol prices would be 5.09% lower than sugar in New York, down 3.44% from the effective data of -1.65% for the period. For November, SAFRAS & Mercado expects the average price in reals for hydrated ethanol to fluctuate by BRL 4.80 a liter, outside of mills. Inside of mills, that should be equivalent of 4.03 per liter in Ribeirão Preto. With an expected average dollar of BRL 5.70 against an average price of 19.00 cents for March 2022 in New York, which, inside of mills, would be equivalent of 17.69 cents, we can expect an increase in the advantage of hydrated ethanol over NY raw sugar to the positive level of 13.06% considering the equivalence of hydrated ethanol at 20.00 cents and without freight.