Porto Alegre, May 17, 2021 – The foreign market is pricing the crop losses in Brazil and parts of Europe. Climate risk in the Center-South reinforces pressure on the compliance with export contracts for the new season. April was a period marked by important rallies for the current driver contract (July/21) traded on the New York exchange. This asset, still at the end of April, had a session when it surged by 4% in view of the update on the biweekly production in Brazil’s Center-South. The first information on the new crop pointed to a 30% decline in the cane harvest and a 35% decline in sugar production in annual terms. These data only reinforced the perception that the crop must have a lower volume of cane and by-products, and that, besides the forecast of lower final volumes, also started very weakly.
SAFRAS & Mercado’s expectation is that the volumes of 605 million tons of cane for the 2020/21 crop will be reduced to 580 million at the end of the 2021/22 season. In Europe, we also have indications of a 10% decline in the beet harvest in France, also due to climatic risk with higher-than-expected frosts in the country’s producing regions. Although France is not a major global player and its production is almost exclusively used for its domestic demand, it still creates the perception that the global scenario is going through a season of negative adjustment in supply. On the demand side, SAFRAS & Mercado reinforces that the pressure is not downwards due to the inelasticity of the consumption curve characteristic of this commodity.
In Brazil, the issue of VHP sugar stocks is also taken into account, helping to support external prices and oscillating below historical standards for the short and long term. Still in late March in the Center-South, VHP stocks were at 2.78 million tons. This volume is down 0.87% from 2.82 million tons at the same moment of the previous year and down 16.75% from 3.34 million tons in the previous month. Against the 5-year average of 1.96 million tons for the same period, recent volumes are 42.22% higher. In the Northeast, the stored volumes of VHP reach 163 thousand tons, with an increase of 2.06% YoY, against 160 thousand tons. In the margin, we have a decrease of 2.38% from 167 thousand tons and a decline of 16.56% from the 5-year average of 196 thousand tons for the same period.
In this context, in April, the average closing price of the July/21 contract on the New York exchange was 16.01 cents. In comparison with the same month of the previous year, there was an increase of 57.55% over the average of 10.16 cents. In the margin, there was an 0.07% decline when compared to the 16.02 cents trading average seen in March. Expanding the analysis point of view, we see that the average price of April this year was 20.25% above the average price for this period during the last five years, which is currently around 13.31 cents.
In the previous month, current prices were 12.38% higher than the average of the last five years for the period, which until then hit 14.26 cents. As a result, the average price of the last five years between March and April decreased by 6.62%, while the May/21 price level decreased 0.07% in the margin. So, there was a negative shift from the level of the historical average relative to the current price level of July/21, even though it also slightly fell in the margin. For April, SAFRAS & Mercado’s expectation was for prices around 15.50 cents, which was 3.18% below the effective average price of 16.01 cents for the period. For the month of May, SAFRAS & Mercado expects prices to be around 17.00 cents, which would account for increases of 59% YoY, 6% in the margin, and 27% over the five-year average price for the same period.