year highs and Brazil coming out of lock-down, demand is bound to improve domestically and externally. Currently, Brazilian ethanol parity is at its highest level for several years and near or above current sugar prices. Therefore, the split is likely to increase in favour of ethanol next April, when the next harvest officially starts. However, it should be remembered, it has been estimated, that over 40% of next season’s sugar exports have been priced by mills. Unless there is a catastrophic collapse in prices and the mills buy back they will produce this sugar. It should be noted that the biggest expansion in ethanol production in Brazil has been from corn. The Brazilian government’s agency, Conab, see Corn ethanol increasing this season by 15% compared with last season. With more plants coming online over the next few years, ethanol from corn is expected to continue to grow over the next few years. This expansion has had another negative impact in that the sugar cane planted area is shrinking. Conab estimate the cane area fell by 4.1% in 2021/22 to 8.2 million hectares despite attractive sugar prices. It is possible more area will be lost to corn and soybeans which rose to their highest level in a decade earlier this year with surging demand from China.
CONAB ESTIMATE THE CANE AREA FELL BY 4.1% IN 2021/22 TO 8.2 MILLION HECTARES DESPITE ATTRACTIVE SUGAR PRICES.
The value of the BRL could also impact. The currency has remained, historically, weak against the USD since the beginning of the pandemic when it collapsed from 4.00 to over 6.00. This enabled mills to lock in sales at excellent BRL levels despite sugar prices being much lower. With a Presidential election in October 2022 the Brazilian currency could become even more volatile and possibly allow more sugar pricing or help raise the ethanol parity level.
Therefore, much can happen between now and the start of the 2022/23 CS harvest. While nothing is written in stone it can probably be assumed there will be no huge improvement in the amount of cane no matter how much rain falls over the next four months. It is likely the harvest will start late in some areas to give younger cane more growing time. At the moment, any production over 35 million tonnes would seem improbable. While several factors mentioned above would have to coincide for production to come in lower than the current season, it is by no means impossible.
It is too early to speculate on next season’s global production. India have only just started this season’s harvest and the Thai harvest will not start until early December. While Thai production is likely to continue to improve, the big question mark remains over India and its ethanol policy. The long term plan is to produce much more ethanol from cane, thereby eliminating their large sugar surpluses. They hope to reach 20% ethanol blending with gasoline by 2025. This is an ambitious goal and dependant on many infrastructure challenges being achieved over the coming three years. In the mean- time Indian farmers will, possibly, grow even more sugar cane.
In conclusion, sugar prices look well supported and bar a calamitous change in the global economic picture with a resurgence of the pandemic they should remain so. Over the next few months the up-side potential also looks relatively limited as Indian sales should plug supply gaps. However, all could change if Brazilian production does take a hit next season. A third successive global production deficit would only mean higher prices.
Howard Jenkins E:
howard.jenkins@
admisi.com T: +44(0) 20 7716 8598
7 | ADMISI - The Ghost In The Machine | Q4 Edition 2021
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