Porto Alegre, October 26, 2020 – Hydrated ethanol presents a slight deceleration of disadvantage against sugar, with gains of the biofuel in the physical market and a slight appreciation in the exchange rate in Brazil. The change in the driver contract from the first to the second screen in New York keeps sugar higher in the short term, neutralizing most of the reduction in the disadvantage of hydrated ethanol.
In September, the average price ratio between hydrated ethanol in the Brazilian physical market compared to raw sugar prices in New York maintained the predominance of the pattern of disadvantage of the biofuel against the commodity. The move ended up dropping the advantage of sugar from 22% to 17%, a level last seen in July. Despite advances in ethanol and exchange rate, sugar also ended up appreciating, although not because of its own fundamentals but of the change in the level of oscillation of the driver contract in New York, which went from the first to the second screen or from October 2020 to March 2021.
In this scenario, the average sugar price grew by 70 points in this adjustment of the driver’s position, changing from the level of 11.50 cents to the level of 12.30 cents. After that, March 2021 even continued with its gains, advancing into the level of 13.50 cents during the month’s highs, but later falling slightly to the level of 13.20 cents. This whole context maintained the scenario of a strong negative ratio for hydrated ethanol, even though the latter had its own appreciation, which was supported by a stronger real on the monthly average.
Since the start of this phase of lower comparative prices, still in March 2020, the month of August was the second-worst moment for the biofuel, by oscillating with a -22.43% ratio, second only to May (-22.65%). Now, the September data show a -17.12% ratio just to confirm this reading. SAFRAS & Mercado warns that there is still a scenario of strong change throughout the fourth quarter of 2020 and the first quarter of 2021.
The expectations of stronger ethanol in the physicals remain firm in the market, although not as intensely as before. The indications of the future price curve point to a scenario of negotiations with hydrated ethanol in the Paulínia region at around BRL 2.44 a liter for December this year, and BRL 2.45 for January next year. February 2021 already has lower levels, at BRL 2.41 per liter. On the other hand, sugar in New York has very clear signs that it found its short-term high at 13.50 cents and is unlikely to evolve much further from that. The fundamentals of the 2020/21 crop in Asia reinforce this scenario, besides the technical and graphic fragility of the current bullish movements compared to March 2021.
At the other hand, we will have a still volatile exchange rate with strong trends towards devaluation with the electoral, fiscal, and macro risks in the short term. Therefore, rates between BRL 5.50 and 5.65 must be maintained over the next few months, which will serve as a vector for neutralizing ethanol gains in cents. The greater the devaluation of the exchange rate, the greater the negative pressure on hydrated ethanol prices in cents per pound.