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Brazil's soaring corn prices raise cloud over Sao Martinho corn ethanol project


Brazil’s soaring corn costs, besides the hit to energy prices from coronavirus, have cast a cloud over $90m plans by cane crusher Sao Martinho to expand into corn ethanol, in weighing on prospects for returns.


Felipe Vicchiato, the Sao Martinho chief financial officer, said that the group required “a higher visibility of the oil price in order to make a decision” about whether to proceed with plans for an ethanol plant attached to its Boa Vista cane processing plant in the state of Goais.


Citing an oil price of about $45 a barrel, and factoring in an exchange rate of some R$5.4-5.5 per $1, he said that “we have to be more comfortable with that, and see if oil prices are going to stabilise around this level”.


Brent crude stood on Wednesday at $41.86 a barrel, up 1.3% on the day.


‘Bigger guarantee’

While the oil price was an indicator of the sales revenues that could be obtained from the scheme, costs had been swollen in part by the weakness of Brazil’s real, which inflated the cost of imported equipment, and also by an upgrade to storage specifications at the site.


“The initial capex that we talked about is going to be higher should we decide to go ahead with the project,” Mr Vicchiato said, noting that “we will have to increase our storage of corn and maybe the storage of ethanol as well.


“We see that… [the corn price] can go up 30%, 40% from one month to the other,” with Brazilian values of the grain boosted this season by a drain on inventories from a strong export programme, as well as from softness in the real, which boosts the domestic price of assets traded internationally in dollars.


“If we are able to store more corn then we have a bigger guarantee” over costs, he said, while adding that were prices to maintain current values “then the project would be hindered”.


‘Payback in about six to seven year’

He envisaged that longer term, “if you look five to six years [ahead] you imagine that there will be a lot of supply in the region” thanks to the growing adoption by farmers of safrinha corn, planted early in the calendar year on land vacated by the soybean harvest.


This trend would mean that corn prices “should go down”.


However, he stressed company ideas of a “payback… in about six to seven years” on its investment in the plant, with a decision whether to go ahead made “by the end of the current year.


“I cannot tell you whether it’s going to be in October or in December. But we have already started to evaluate this,” with the matter currently considered by the Sao Martinho committee, before heading the group’s executive committee, and thence the board.


“Then we are going to decide whether it is worthwhile to invest right now and what is the best way to finance the project.”


Storage squeeze

Storage is in fact a broader topic for Brazilian agriculture, with Mato Grosso research institute Imea saying that the state, Brazil’s top corn and soybean producer, had storage capacity well below the figure of 120% of output which the UN Food and Agriculture Organization recommends.


Mato Grosso crop storage capacity, at 37.9m tonnes, “has grown only 1.3% per year since 2015, while production of the state grew 2.2% per annum”, Imea said.


The “good news” was Brazil’s launch last month of a fresh plano safra farm support programme, “which projected more resources for storage, which can stimulate investment in sector”.

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