Porto Alegre, May 25, 2021 – The expansion of the disadvantage of hydrated ethanol in April reduces the initial movement of neutralization of discounts against the commodity started in March. Even so, new gains of hydrated ethanol this month may lead the biofuel back to the resumption of the advantage over sugar in the foreign market. The month of April, in the comparison with hydrated ethanol prices in the domestic market in cents per pound against New York sugar, was a period marked by the resumption of disadvantage levels of the biofuel in the patterns observed early this year when the price ratio was slightly above -16% for hydrated ethanol. This movement occurred almost exclusively due to the devaluation of approximately 7% of the average price of hydrated ethanol in the physical market, in reals per liter, compared to a decline of just over 1.00% in sugar prices in New York. Besides neutralizing the downward trend in the comparison of hydrated by the fall in sugar, the exchange rate also played a positive role by mitigating the biofuel losses in cents per pound, as the real rose 0.19% against the dollar.
In fact, it is a very small appreciation for the exchange rate but even so, added to the decline of sugar in New York, it ended up preventing the negative ratio of hydrated ethanol from being even larger. SAFRAS & Mercado warns that this movement only happened because of the downward adjustment that hydrated ethanol presented during the second half of April. In May, the biofuel situation has been quite different, with increasingly solid gains in trading prices in reals per liter in the physical market. Prices in Ribeirão Preto, which started the month at BRL 3.23, now fluctuate around BRL 3.33 a liter, with indications of new gains over the month. This leads to a tendency towards a strong neutralization of the current negative relationship of hydrated ethanol, which may seek at least parity with sugar, considering that the latter, in turn, has shown bearish signs in early May.
Moreover, reinforcing this scenario, the real has also been stronger against the dollar in May, which tends to help even more the recovery of hydrated ethanol also in cents. Analyzing the month of April and looking at each day individually, we can find moments of differentials at -7.63% (on April 29) and -16.63%, registered on the 9th of the same month. This shows that the pattern of strong disadvantage of hydrated ethanol was predominant throughout the month with a very moderate level of volatility. The average monthly value of hydrated ethanol in BRL 3.08, discounting 13.3% of São Paulo’s ICMS and BRL 1,309 of PIS/Cofins, and converted into cents a pound, with an average exchange rate of BRL 5.6181 in the period, was equivalent to 12.80 cents, down 6.77% from the average of 13.73 cents observed for this asset compared to the immediately previous month, already with freight discounts, elevation and FOB conversion.
In the yearly comparison, the April average for hydrated ethanol in cents per pound presented gains of 78.23% against the level of 7.18 cents in April last year. On the average of 2021, the equivalent price of hydrated ethanol inside of mills is around 12.52 cents, up 10.16% from the average of 11.37 cents accumulated during the same period of the previous year.
In a very summarized way, we can interpret that, in the margin, the devaluation of hydrated ethanol in reals (-6.60%) was partially increased by the appreciation of the real against the dollar (0.19%) to the level of -6.77%. This value was partially offset by -1.00% losses of New York raw sugar in the same period, which resulted in a negative price differential of 11.24%.
This level of differentials in April was 6.58% above the same period in the previous year when, until then, hydrated ethanol was 18.17% below New York sugar. In the margin, we have a decrease of 5.26% after a 6.34% disadvantage in the previous month.
Against the historical 5-year average for the same period, we have decreases of 2.33% from the pattern of differentials of -9.26% usually seen for this time of the year. The 5-year average itself ended up increasing its negativity by 6.54% in this period, going from -2.72% to -9.26% between March and April, with the most recent data included.
The expectation of SAFRAS & Mercado for April was that the disadvantage of hydrated ethanol against sugar in New York would hit -18.17%, which was 6.58% below the official data of -11.59% for the period. For May, SAFRAS & Mercado expects that the average price in reals for hydrated ethanol will be BRL 2.28 per liter, outside of mills. Inside of mills, it must be equivalent to BRL 2.71 a liter, based in Ribeirão Preto.
With the average dollar expected at BRL 5.40 and average price of 16.75 cents for the July/21 contract in New York, which inside of mills must be equivalent to 15.40 cents, we can expect a reduction in the disadvantage between hydrated ethanol and NY raw sugar to -7.73%.