Porto Alegre, August 23, 2021 – The devaluation of the real against the dollar in Brazil was also added to the appreciation of raw sugar in New York in the same period. Fluctuations around stability are expected for August. At the end of the month of July, it was possible to observe a decline in premiums for hydrated ethanol against New York sugar, back to differential standards. Although these spreads only fluctuate slightly below stability, in fact there was a change in the price ratio vector between the two products, which, compared with the average premiums of 3.65% in June against the average differentials of -0.76% in July, results in an average decline of 4.41% between the two periods, which is not so subtle.
Basically, the market had a combination of forces that led to this result. First, we had the inertia of hydrated ethanol prices in reals per liter, which increased by just 0.46% from June to July. A very weak appreciation in domestic prices made hydrated ethanol be exposed to the volatility of the exchange rate and sugar in New York. In terms of exchange rate, we had a negative vector with the devaluation of the real against the dollar, whose averages went from BRL 5.0367 to 5.1641 between June and July. After that, sugar itself appreciated in New York, going from 17.31 to 17.73 cents.
Each of these vectors is explained in a specific report by SAFRAS & Mercado. For August, SAFRAS & Mercado projects again a price ratio around stability based on a stronger price of hydrated ethanol, around BRL 3.63 per liter, but which must be neutralized by an even weaker real against the dollar, at around BRL 5.18, and a raw sugar price in New York also more valued, at nearly 17.80 cents, which must result in an arbitrage between hydrated ethanol and New York sugar of +0.33%.
Analyzing the month of June and looking at each day individually, we can find moments with premiums at 6.49% (on July 14) and differentials at -4.49% (on July 1). This shows that the pattern of moderate disadvantage for hydrated ethanol prevailed only at the beginning of the month, with most days having registered premiums for hydrated ethanol. The monthly average value of hydrated ethanol is BRL 3.55, cutting 13.3% of ICMS in São Paulo and BRL 1.309 of PIS/Cofins and converted into cents per pound, with a dollar average of BRL 5.1641 in the period, which was equivalent to 16.21 cents, down 0.86% from the average of 16.35 cents observed for raw sugar in New York, with freight, elevation and FOB conversion.
Year over year, the July average for hydrated ethanol in cents per pound presented gains of 61.98% against 8.70 cents in July last year. On the average of 2021, the equivalent price of hydrated ethanol inside of mills fluctuates by 14.08 cents, up 40.20% from the average of 10.05 cents accumulated during the same period of the previous year.
In short, we can interpret that, in the margin, the hydrated ethanol appreciation in reals per liter (+0.46%) was largely neutralized by the devaluation of the real against the dollar (2.53%) together with the increase of 2.41% of sugar in New York.
The expectation of SAFRAS & Mercado for July was that the advantage of hydrated ethanol over sugar in New York would oscillate by 2.54%, up 3.30% from the official data of -0.76% for the period. For August, SAFRAS & Mercado expects the average price in reals for hydrated ethanol to fluctuate by BRL 3.463 per liter, outside of mills. Inside of mills, the average price must be equivalent to 3.01 per liter in Ribeirão Preto.
With an expected average dollar at BRL 5.18 and average price of 17.80 cents for October/21 in New York, which inside of mills must be equivalent to 16.42 cents, a reduction should be expected in the advantage between hydrated ethanol and NY raw sugar to +0.33%.
SAFRAS Latam