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Sao Martinho speeds up hedging into reviving sugar market

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Sao Martinho revealed it was using the revival in sugar prices as an opportunity to accelerate markedly its forward sales of the sweetener - even for the 2021-20 season which is still more than seven months away.

 

Felipe Vicchiato, finance director at the Brazilian cane crusher, termed as “quite strong” the sugar price, which on Wednesday stood at 12.75 cents a pound for New York’s October contract, close to five month highs, and up 41% on a spot contract basis from a low reached in April, amid the peak of Covid-19 concerns.

 

“We see the prices going up consistently, a result a little bit of maybe a smaller supply from Thailand,” the second-ranked exporting country after Brazil, “and even India,” he said.

 

Sao Martinho was “taking advantage of this window and accelerating our hedging”, he said.

 

Rapid sales

Already, the group has “practically closed” its sales programme for this season, having as of the end of June the equivalent of 95% of its sugar output for 2020-21, at an average price of 13.08 cents a pound.

 

That compared with a 77% figure three months before, and an equivalent figure at the end of June last year of 78%.

 

Furthermore, for 2021-22 - which does not start for the company, or for Brazil’s Centre South where it operates, until April next year – it had already sold 320,300 tonnes of sugar, equivalent to 28% of expected production, at 12.23 cents a pound.

 

That was up from 24,284 tonnes as of the end of March, and a new crop figure of 32,615 tonnes as of the close of June 2019 - and with further sales in progress.

 

“By the end of September, we should have an even higher number -- higher amount of hedge for 2021-22, getting close to about 50%,” Mr Vicchiato told investors.

 

‘Maximum capacity’

The strategy came despite an expectation that sugar prices could rise further yet, given that the likes of Brazil and India, the top two sugar producers, looked unlikely to increase output ahead, he said.

 

“What we know is that Brazil is not going to increase production,” Mr Vicchiato said, viewing Sao Martinho itself as operating around its “maximum capacity to make sugar”, a dynamic it saw as evident more widely too.

 

“I do not see a lot of room to increase the production of sugar in the next year, if you consider the Centre South region of Brazil.”

 

Data on Tuesday from industry group Unica showed Centre South sugar output for the April-to-August period, the first five months of the region’s 2020-21 crush season, soaring 48% to 19.73m tonnes, as price incentives encouraged mills to lift to 46.9% the proportion of their cane processed into sugar rather than ethanol.

 

For the same period last season – before the Covid-19 hit to fuel use sent ethanol prices tumbling – the sugar take was 35.3% of cane.

 

‘Prices close to peak’

However, broker BTG Pactual said that Sao Martinho’s decision to sell sugar “as fast as it can” could reflect concerns that prices of the sweetener could be poised for a retreat.

 

Noting that the crusher was forward hedged “far more than historically”, BTG Pactual said that this acceleration “suggests that Sao Martinho not only sees current sugar prices as attractive as it also fears that they may be close to peak”.

 

Bradesco BBI said that Sao Martinho’s strategy would protect the group “against downside risks on sugar” prices, which it viewed as a potential threat.

 

“We are concerned that Brazilian sugar and ethanol mills will continue to favour sugar in the 2021-22 crop, which may add to global sugar stocks and pressure sugar prices in the medium-to-long term.”

 

Cane production

The rapid pace of Sao Martinho’s sugar hedging, even into 2021-22, also defies concerns over dryness which Mr Vicchiato acknowledged would drag the group’s own cane harvest below expectations this season.

 

However, that decline would be “more than offset” by the boost to sugar concentrations in cane encouraged by the dryness, while for next season, there was still the prospect of wet weather to boost crop condition.

 

“For the next harvest, we still have all the summer rainfall that will happen beginning in October, November and goes until March.”

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