The idea that sugar prices are heading to their lowest in more than a decade, as voiced by Goldman Sachs, received support from BTG Pactual, which warned of a “dramatic effect” on Brazilian output from the oil price plunge.
The Sao Paulo-based bank warned that sugar, and ethanol, prices were heading so low that they “should barely cover the operating and financial costs even for some of the most efficient producers” in Brazil, the top exporter of the sweetener.
“For the rest of the industry… we may expect material losses.
“So we expect pressure on stock prices to remain for as long as lower oil prices do,” although the prospect of Brazil’s RenovaBio programme to boost biofuels demand could ease this impact - from 2022 when it comes into effect.
‘Spread has collapsed’
The warning came as the bank forecast that New York raw sugar futures would in 2020-21 average 8.5 cents a pound – a level not seen since 2007.
The estimate – while well below the futures curve, and a spot price on Monday of 11.02 cents a pound - is in line with an outlook last week from Goldman Sachs, which flagged a boost to production prospects from the tumble in prices of oil, and other energy commodities such as ethanol.
Weaker ethanol prices, which in Chicago’s futures market set a record low last week, boost the incentive for cane processors to switch their output mix towards sugar, at the expense of the biofuel.
“The ethanol-sugar spread has collapsed, incentivising greater milling of the upcoming Brazilian cane crop for sugar, materially increasing the Brazilian [sugar] supply outlook for 2020,” Goldman said.
Ethanol prices to fall further?
BTG Pactual said that this dynamic could see sugar output in Brazil’s key Centre South region soar in 2020-21, as starts next month in the country, to 41.70m tonnes - a jump of 49% year on year.
“Brazil alone could turn the sugar market back to a surplus of 7.6m tonnes globally [in 2020-21], supporting our view of lower prices ahead.”
The assessment was based on expectations of a further cut by state energy giant PetroBras to its gasoline price which, at R$1.34 per litre, remains some 30% above international import parity, despite a series of reductions already.
Estimating that this price will be cut to R$1.03 per litre feeds through to an ethanol price for cane crushers of R$1.40 per litre, down 26% on the average price of R$1.89 per litre they have received over the past 12 months.
’As low as 8-9 cents per pound’
That is equivalent to a price for crushers of about 7.5 cents per pound in sugar terms, compared with the 9.9 cents per pound they are receiving for sugar – which many mills have sold forward anyway at far higher prices for substantial volumes.
“We thus believe that not only Brazil will increase sugar mix during the upcoming sugarcane crop starting next month but that we may actually see Brazil maximising its sugar output between 2020-21 and 2021-22 crops.
“Ultimately, we fear that, in the short-to-midterm, [New York] sugar prices may come to as low as circa 8-9 cents per pound before we start seeing any supply cuts from other countries.