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Sao Martinho upbeat on sugar price prospects

Sao Martinho revealed that it was holding off forward hedging of sugar in expectation of higher prices, foreseeing the potential for a weak finish to the Brazilian cane crushing season.

The Sao Paulo-based company, one of Brazil's major sugar and ethanol groups, had, as of the end of March, hedged 48% of its sugar exposure for 2014-15, which started in April, down from 83% a year ago.

The fall reflects in part corporate activity - including the consolidation of volumes from the Santa Cruz operation in which Sao Martinho has raised its stake above 90%, but which has eschewed forward sugar sales.

Nonetheless, the group also revealed that it was also banking on a revival in sugar prices ahead.

Modest prices for now reflected "some pressure" from a rapid cane harvest as mills in the key Centre South region, responsible for some 90% of Brazil's harvest, "are crushing at high speed because the weather is very dry", Felipe Vicchiato, the group's manager of investor relations, said.

"In the short-run, we have a large volumes of sugar coming in, and the mills have to ship this."

Sao Martinho had even by the end of March hedged a relatively high proportion of sugar exposure short-term.

'Sugar could rally'

However, hedging against October futures was at a more modest 37% of expected volumes, including bought-in cane, and for March 2015 at 17%.

"We believe that there could be a pressure at the end of the crop, and sugar could rally," Mr Vicchiato told investors.

"We want to tap into this. At the end of the day, there could be some [upward] pressure and sugar could go beyond 20 cents a pound."

Sao Martinho believes there are "still uncertainties" over the cane harvest in the Centre South, which includes Sao Paulo state where it is based, and where crops suffered from drought early in 2014.

Observers including broker Marex Spectron have cautioned over the potential for a hangover on Centre South cane production from drought, while industry group Unica has blamed the dryness for an 8.8% drop in the region's cane yield so far this season, with the potential for worse to come 

The expectation is that this yield shortfall will "persist", and may grow, "especially for cane available for harvest in the last third of the season", Unica said.

Sao Martinho also flagged the threat from the El Nino weather pattern, which often causes Asian dryness, to production in Thailand, the second-ranked sugar exporter, and India, the second biggest producing country, where the monsoon is so far proving disappointing.

Profits fall

Mr Vicchiato's comments came as Sao Martinho discussed the release of results released earlier this week showing a halving to R$6.43m in earnings for the January-to-March period, the fourth quarter of the group's financial year, reflecting costs at its Boa Vista joint venture with oil giant Petrobas.

Underlying earnings before interest, tax, depreciation and amortisation (ebitda) rose 2.1% to R$147.5m, on revenues up 9.3% at R$459.2m, underpinned by higher ethanol volumes and prices.

Indeed, sugar accounted for just 43% of group revenues during the quarter, compared with 57% a year before.

'Upside risks for sugar prices'

Analysts at Bradesco termed the quarter "weak, mainly due to much lower cogeneration activity, as well as non-recurring expenses related to leasing, hedging and fiscal credits", but said that Sao Martinho had achieved a "strong" performance over the financial year as a whole.

Bradesco restated an "outperform" rating on Sao Martinho shares, with a target price of R$41.00.

Itau, which is reviewing its rating on the shares, termed the quarter "uneventful" for the group, but said it too saw "upside risks for sugar prices at the current trading levels.

"The ICE sugar [futures] forward curve indicates an average price of 18.75 cents a pound for the 2014-15 season, 6% higher than in 2013-14, which we believe is conservative considering the potential harvest failure in Brazil and other major export countries in case of a strong El Niño event."

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