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Biosev breaks with rivals, and sells into sugar rally

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Biosev has broken ranks with other cane crushers and sold heavily into the sugar market rally - hedging about 40% of its production for 2017-18 nine months before the season has even started.

The Brazilian-based group, the world's second-ranked cane processor, revealed it had "significantly increased its hedge positions" in sugar, exploiting the surge in prices of the sweetener to their highest in nearly four years on the New York futures exchange.

Biosev, which is controlled by ag trading giant Louis Dreyfus, has sold 645,000 tonnes forward for next season, which starts in April 2017.

"The sugar volume hedged represents approximately 40% of Biosev's exposure for the 2017-18 crop year," the group said.

'Already sold too much'

The strategy contrasts with a reluctance by producers overall to sell into the rally – a dynamic which has surprised many investors, and indeed been seen as contributing to the return of New York futures above 20 cents a pound.

Regulatory data show producers and merchants held a net short of 457,272 contracts in New York futures and options as of Tuesday last week – up from the 407,941 contracts at the start of the year, but well below levels above 500,000 contracts reached in 2008.

By contrast, managed money, a proxy for speculators, pushed their net long to a fresh record high of 262,492 contracts.

Marex Spectron, posing the question of "why are the producers not selling", said that part of the reason may be that "they have already sold too much, too early and too cheaply, and are beginning to face margin worries".

That is, lenders may be asking for extra collateral against short positions taken out at far lower prices, and which are now well out of the money.

'Prices are not going to collapse'

However, noting that mills in Centre South Brazil – where Biosev is based – are particularly keen on forward hedging, Marex also flagged a likely expectation among producers of higher sugar prices yet.

"If they wanted to they should be able to continue hedging scale up.

"But they are not, at least not to any major extent.

"So we guess that they have made a market judgment that this market is not a 'flash in the pan', and that forward prices are not going to collapse - or if they do, they will recover by and by."

Currency hedge

The strength of the real "is also inhibiting them from selling", Marex added, with a firmer Brazilian currency cutting the value in local terms of assets which are priced internationally in dollars.

Biosev said it had also hedged $278m at an exchange rate of R$3.692 to $1 for the 2017-18 crop year, protecting its takings in local terms from any further appreciation in Brazil's currency.

The ramped up currency and sugar hedges are "part of Biosev's strategy to secure a robust cash flow from operations… in a positive environment for sugar prices", the group said.

By Mike Verdin

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