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Brazil cane giants diverge on sugar hedging strategy

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Sao Martinho revealed it had diverged with rival Biosev and slowed forward hedging for next season, extending a strategy of delaying sales in the hope of higher prices.

The Brazilian cane crusher said it had, for the 2016-17 season, which starts in April, sold forward 433,497 tonnes of sugar as of the end of December, equivalent to 50% of its exposure, excluding sales through an industry deal.

That is a smaller amount than a year before. As of the end of December 2014, the group had sold 599,724 tonnes of sugar ahead for 2015-16, equivalent to 64% of net exposure.

The strategy contrasts with that of rival Biosev, the world's second-largest cane crusher, which had as of the end of December hedged 1.15m tonnes of sugar, equivalent to 74% of exposure.

That is more than twice the amount it had sold forward a year before, for 2015-16, at 574,000 tonnes, and 36% respectively.

Hedging prices

However, Sao Martinho signalled hopes of higher sugar prices, revealing a "strategy to carry sugar inventories" too to sell at higher prices, which indeed materialised late in 2015, encouraged by a weak real and weather threats to output in Brazil, India and Thailand.

The group's sugar stocks as of the end of December were, at 397,699 tonnes, up 13.5% year on year.

Biosev's sugar inventories were, at 372,000 tonnes, up 1.3% year on year as of the same date.

Sao Martinho's hedging strategy had the advantage as of the end of last year, when it had achieved an average of 13.96 cents a pound for next season's sugar, ahead of the 13.42 cents a pound Biosev gained for its forward sales.

However, sugar prices have fallen since, by some 14% so far this year to 13.15 cents a pound on a spot contract basis, amid the broad markets sell-off and a strong finish to the Brazilian Centre South cane crushing season.

Inventories sold down

Sao Martinho unveiled its data as it reported a 42% jump to R$76.0m in earnings for the October-to-December quarter, on revenues up 41% at R$4726.0bn.

The increase reflected increased prices of the ethanol and sugar that the group produces from cane and, in particular, the higher volumes of the biofuel sold.

The group hiked by 66% its sales volumes of hydrous ethanol, an alternative to gasoline for flex-fuel cars, and by 47% volumes of anhydrous ethanol, as blended with gasoline.

The strategy was evident in a 48% drop in the company's inventories of hydrous ethanol as of the end of December, and a 4.1% drop in anhydrous ethanol stocks.

Market reaction

The results were well received by analysts at Banco PTG Pactual, who said that the improved profits were "testament to [Sao Martinho's] strategy of carrying over higher ethanol and sugar ethanol inventories".

And the bank said it remained "upbeat on sugar and ethanol [market] prospects".

On sugar, "expectations of global deficits in production, after years of surpluses, should support [world] prices.

"And on ethanol, we reckon prices will eventually edge lower, while remaining at very profitable levels," the bank said.

PTG Pactual, which termed "very attractive" the average price of 13.96 cents a pound achieved for 2017-18 by Sao Martinho so far, restated a "buy" rating on the cane crusher's shares, with a price target of R$55.

By Mike Verdin

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