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
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.
group also revealed that it was also banking on a revival in sugar prices
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
'Sugar could rally'
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.
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
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.
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.
accounted for just 43% of group revenues during the quarter, compared with 57%
a year before.
'Upside risks for sugar prices'
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.
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
"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."