In May, the average disadvantage of hydrated ethanol in the Brazilian physical market compared to New York sugar, in cents per pound, inside of mills (price measurement of the NYSE driver contract), was 22.65 %, against 18.17% in the previous month.
The increase in the disadvantage of hydrated ethanol of a little more than 4.48% from April to May was well below what was seen from March to April, when hydrated ethanol premiums plunged by more than 17.09%. Since March this year, the market has observed monthly averages fluctuating in negative territory in the comparison of hydrated ethanol with sugar in New York, reversing a pattern of hydrated ethanol premiums seen between August 2017 and February 2020. The most recent data from May only reaffirm the deepening of this new standard.
The intensification of this negative territory occurred with the slowdown in sales and demand in the face of the impacts of the COVID-19/crude oil/exchange rate crisis, with this movement having started in February, when the downward pressure on ethanol prices already existed naturally due to the start of the new 2020/21 season.
Basically, the market had a strong devaluation of 5.84% of the real against the dollar in a context of 4.99% gains of raw sugar in New York. These movements ended up neutralizing the highs of hydrated ethanol, which, during the same period, hit 5.71% in the margin from April through May. So, the appreciation of hydrated ethanol in the physical market was neutralized by the devaluation of the real against the dollar in a context of appreciation of sugar, which culminated in the expansion from -18.17% to -22.65% of the disadvantage of hydrated ethanol against the commodity. If not for the gains of ethanol in reals, the disadvantage levels of hydrated ethanol would probably have been higher, reaching the range of 30% to 35%, instead of advancing only to the current levels of 22%.
Analyzing the month of May and looking at each day individually, we can find moments of differentials at -29.03% (on May 20) and differentials at 12.05%, registered on the 29th of the same month. The average monthly value of hydrated ethanol of BRL 1.78, discounting 12% of ICMS in São Paulo and BRL 1.309 of PIS/Cofins, converted into cents a pound, with the dollar average at BRL 5.6404 in the period, was equivalent to USD/cents 7.21, up 0.46% from the average of USD/cents 7.18 observed for this asset compared to the immediately previous month, already with discounts of freight, elevation, and FOB conversion.
The May average for hydrated ethanol in cents per pound had losses of 39.00% YoY from USD/cents 11.83 seen in May last year. On the 2020 average, the equivalent price of hydrated ethanol inside of mills fluctuates by USD/cents 10.54, down 17.47 from the average of USD/cents 12.77 accumulated during the same period of the previous year.
In a well-summarized way, we can interpret that, in the margin, the appreciation of hydrated ethanol in reals (+5.71%) was reduced to gains of only 0.46% due to the devaluation of the real against the dollar in the period (-5.84 %). Moreover, the arbitrage differentials included a neutralization movement in the face of the sugar hike in New York in the same period (+4.99%), which inside of mills increased to +6.26% due to the movement of the real’s low against the dollar, which resulted in a negative arbitrage of 22.65% for hydrated ethanol inside of mills.
This level of differentials in May was 38.86% below the same time last year, when until then hydrated ethanol was 16.21% more profitable for mills than New York sugar. In the margin, there is a 4.48% decrease from the 18.17% disadvantage of the previous month.
In comparison with 5-year historical average for the same period, we have losses of 17.10% from a pattern of differentials of 17.10% usually seen for this time of the year. The 5-year average itself dropped by 3.54% in this period, going from -1.41% to -4.95% between April and May, with the most recent data included.
The expectation of SAFRAS & Mercado for May was that the disadvantage of hydrated ethanol against sugar in New York would fluctuate by 16.60%, up 6.15% from the official data for the period. For June, SAFRAS & Mercado expects that the average price in reals for hydrated ethanol will fluctuate by BRL 2.03 a liter, outside of mills. Inside of mills, the average price must oscillate around BRL 1.65 a liter in Ribeirão Preto.
With an expected average dollar at BRL 4.95, against the average price of USD/cents 11.90 for the October 2020 contract in New York, which inside of mills must be equivalent to USD/cents 10.46, we can even have a reduction of the disadvantage between hydrated ethanol and NY raw sugar to 9.73%.