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BTG backs sugar group shares despite tax, cane debates

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BTG Pactual restated expectations for rises in prices of shares in Brazilian cane crushers, despite questioning ideas of a smaller-than-expected harvest, and amid doubts over a tax rise which would support ethanol prices.

The bank forecast shares in Sao Martinho, which closed on Friday at R$35.50 in Sao Paolo, hitting R$47 a share, with stock in Cosan forecast reaching R$31 a share, implying a more than doubling from current levels of R$18.89.

New York-listed shares in Adecoagro, the Brazilian cane-to-corn grower in which George Soros is the top investor, were seen reaching $14, up from a close on Friday of $8.08.

The forecast reflected "better prospects" for sugar and, in particular, ethanol prices, with values of the biofuel seen needing to "increase double digits" to marry growing demand with tightening supplies.

'Output could be even higher'

The calculation came despite ideas, following a meeting with Elizabeth Farina, the head of Unica, the Brazilian cane industry group, that the cane output in the Centre South region, responsible for some 90% of domestic production, could exceed the 590m tonnes initially expected, a rise of 3.3% year on year.

"Unica is now hinting that output could be even higher, depending on rainfall patterns," BTG Pactual said.

However, the comments contrast with some other assessments of Unica data last week which showed the cane crush so far in 2015-16, at 374.25m tonnes, running 0.4% ahead year on year, even before heavy rains slowed the harvest at the start of this month.

"An expert has given us his opinion that the crush would have difficulty exceeding 590m tonnes," London broker Marex Spectron said on Monday, quoting the head of a major Brazilian cane-growing enterprise but, given that the comment was made in confidence, declining to reveal a name to

'Plenty of cane'

"The crush is lower than consensus," the broker added, saying that this implied that "the harvesters have been covering more ground to cut less cane, ie the agricultural yield may be falling".

Nonetheless, the issue overall was not the amount of cane, but whether there was the time and capacity to process it all in time.

"There is plenty of cane. There will be no shortage," he said, foreseeing the potential for some 20m-30m tonnes of carryover cane left over at the end of the season, which will he harvested instead in 2016-17.

Indeed, Unica itself, in a report last week, highlighted the potential for a rising volume of carryover cane in Sao Paulo state, within the Centre South region, where the crush was running some 10m tonnes behind last year.

'Target achievable'

However, ED&F Man last week flagged the potential yet for the Centre South cane harvest to exceed 590m tonnes – although sugar levels in the crop could be dented by heavy rains which are common in the region in El Nino periods.

"We believe a target of 594m tonnes of cane is achievable, even with non-ideal weather," the sugar house said.

"In rain/El Niño affected 2009, the Centre South crushed over 220m tonnes of cane in September-January, a similar amount needed to reach this year's target."

'Frozen into inactivity by scandal'

BTG Pactual also flagged in its analysis the potential for a rise in Brazilian gasoline prices from the increase in the CIDE tax which the government is proposing in an attempt to raise much-needed revenues.

Unica's Elizabeth Farina was "confident that a Cide tax hike is still on the table, supported by favourable economic and environmental arguments," the broker said.

"Unica calculates that there is room to hike Cide tax on gasoline by R$0.50 per litre," from R$0.10 per litre to R$0.60 per litre, allowing an equivalent rise in values of rival fuel ethanol.

However, there is uncertainty too over the level of an increase in the Cide tax, and when it might be implemented.

Sucden Financial on Monday noted "pressure on the Brazil government to increase taxes to shore up its budget increased as a result of the credit rating downgrade".

However Brazil's Congress, "frozen into inactivity by scandal and by political motivation, may take some time to arrive at a decision".

Supply vs demand

Even without a Cide rise, BTG forecast a rise in ethanol prices thanks to domestic demand for the biofuel which has "picked up strongly" this year, by 21%, led by a 40% rise in consumption of hydrous ethanol.

Hydrous ethanol is consumed neat, as opposed to the anhydrous ethanol blended with gasoline.

However, ethanol prices "have yet to pick up", weighed by high inventories at the beginning of 2015-16, and the unexpectedly high proportion of cane directed to making the biofuel this season rather than sugar.

Still, "we expect ethanol availability to decelerate in order that supply levels won't be able to keep up with demand," BTG said.

"Hence, we believe ethanol prices should increase double-digits in order to equalise demand."


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