In March, the average disadvantage of hydrated ethanol in the Brazilian physical market compared to New York sugar, in cents per pound, inside of mill (price measure of the NYSE driver contract), was 1.08%, down 5.23% from the previous month, as in February the biofuel paid 4.15% more than New York sugar.
The decline of just over 5% from February to March was also in line with the decline from January to February, which hit 7%. Basically, the market had a strong 12% devaluation of the real against the dollar due to sharp lows of hydrated ethanol, at the level of 15%, which were also in line with the 20% sugar lows in the same period, resulting in a scenario of strong neutralization of vectors, but with a predominance of the greater fall in ethanol, which had extra negative pressure from the exchange rate, resulting in an average of -1% in the price ratio between hydrated ethanol and sugar.
SAFRAS & Mercado warns that for April the indications are for continuous loss in the advantage of hydrated ethanol over sugar in the face of moments of strong falls in the negotiations of hydrated ethanol in the physical market, together with important lows of the real against the dollar, which settled around BRL 5.30, negatively impacting prices in dollars when converted into cents per pound.
Still in March, SAFRAS & Mercado already warned of the trend of reduction in the arbitrage premiums due to the expectation of decline in ethanol prices with the upcoming arrival of the new 2020/21 crop in the Center-South, which was already being carried out sooner than normal by nearly 10% of the production units of the region.
Analyzing the month of March and looking at each day individually, we can find moments of differentials at -20.27% (on March 30) and maximum premiums at 15.30%, registered on the 12th of the same month. The average monthly value of hydrated ethanol at BRL 2.17, minus 12% of ICMS in São Paulo and BRL 1.309 of PIS/Cofins and converted into cents per pound, with an average dollar of BRL 4.8935 in the period, was equivalent to USD/cents 10.38, down 25.01% from the average of USD/cents 13.85 observed for this asset in the immediately previous month, already with the discounts of freight, elevation and FOB conversion. The March average of hydrated ethanol in cents per pound dropped 21.51% from USD/cents 13.23 in March last year. In the 2020 average, the equivalent price of hydrated ethanol inside of mill fluctuates by USD/cents 12.77, down 0.40% from the average of USD/cents 12.82 accumulated during the same period of the previous year.
Roughly speaking, we can interpret that, in the margin, the devaluation of hydrated ethanol in reals (-15.46%) was reduced to -25.01% due to the devaluation of the real against the dollar in the period (-12.46%). Moreover, the arbitrage differentials included a neutralization movement in the wake of the sugar low in New York in the same period (-10.19%), which inside of mill was boosted to -21.72% due to the downward movement of the real against the dollar, which resulted in an arbitrage of -1.08% for hydrated ethanol inside of mill.
This level of differentials in March was 23.57% below what was observed at the same time in the previous year, when, until then, hydrated ethanol yielded 22.50% more for mills than New York sugar. In the margin, we have a 5.23% decrease from the 4.15% advantage of the previous month. Against the historical 5-year average for the same period, losses hit 13.70% compared to standard of premiums of 12.62% usually seen at this time of year. The 5-year average itself dropped by 1.06% in this period, changing from 11.56% to 12.62% between February and March (already including the most recent data).
SAFRAS & Mercado’s expectation for March was that the advantage of hydrated ethanol over New York sugar would fluctuate by 1.13%, which was 2.21% below the official data for the period. For April, SAFRAS & Mercado expects that the average price in reals for hydrated ethanol will fluctuate by BRL 1.60 per liter, outside of mill. Inside of mill, it must oscillate around BRL 1.27 a liter, based on Ribeirão Preto.
With an expected average dollar at BRL 5.29 and average price of USD/cents 10.20 for July/20 in New York, which inside of mill must be equivalent to USD/cents 8.84, the advantage between hydrated ethanol over NY raw sugar may fall to -22.71%.