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SURVIVAL OF THE FITTEST, CHEAPEST AND MOST CLEVER AND NOT THE LARGEST!


We learnt in school that in the species evolution the strongest survives. We then learnt in our professional lives that the smartest and well-funded companies tend to survive and grow. Being right when the world is wrong requires patience and working capital.


In the agricultural world, growing crops is not a bad business in the long term. Wealth can be created by land value appreciation and the yields can be good for most crops (cost of production vs. selling price). One of the issues that farmers tend to have is that they spend a bit more in the good years and don’t tend to prepare for the bad years, but this is not the case with all.


Spending for a farmer can be in the form of longer and more expensive holidays but usually the money goes into more land, more equipment and when things are good, in terms of sugar, more industrial capacity or acquisitions.


Well, in sugar, for the past 8 to 9 years we saw very little in terms of acquisitions in Brazil but more the contrary, as many millers got themselves into chapter 11  acreage carried on expanding as the new mills which were built in the past years reached maturity (acreage around the   in 2017 and have not expanded further. Also in Brazil, cane millers have an option to produce sugar or ethanol to a large degree,


given the large demand for ethanol via the Flex Fuel Fleet which reached 76% of >37 mln vehicles. So, we can say that Brazil peaked, in terms of land, mills but the sugar mix will depend on market forces.


Brazil CS 2019/20 crop is estimated at 560 / 580 mln m/t (we estimate at 578 mln m/t) for the time being. The sugar mix is expected to improve from 34.80% in 2018/19, perhaps by 2 to 3% depending on the market (1% = 765k m/t)


Crude prices have improved in the past few months and so did the gasoline prices in the international market. Brazil is still having to import gasoline (and imported ethanol) and is pricing their own gasoline at market prices. We believe that unless sugar prices are >14 cts, the incentive for millers to producer sugar will not be there.


Another matter to consider is the Brazilian currency (Real) which is on the path to appreciation, depending on economic improvements that are highly linked to foreign and domestic investments (improving) social reforms (reduced or controlled Gov spending) and political behaviour.


32 | ADMISI - The Ghost In The Machine | March/April 2019


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