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Rising price, cane ideas spur Brazilian sugar hedging

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Brazil's sugar producers are advancing forward hedging for next season, to judge by sector leaders Raizen Energia and Sao Martinho, encouraged by higher prices and the potential for higher cane volumes too.

Raizen Energia, the world's biggest sugar exporting company, revealed that it had sold 957,800 tonnes of sugar forward for 2016-17 as of the end of September – six months before the season has even started.

That represented a 69% increase on the 565,800 tonnes hedged forward a year before (for 2014-15), despite a lower price this - in dollar terms.

Raizen has hedged crop this time at 12.9 cents a pound, down from an average forward hedging price of 17.44 cents a pound a year ago - although the weakness of the real makes that equation far less downbeat, for a Brazilian producer, than it might first appear.

'Almost exceeding capacity'

Earlier in the week Sao Martinho said that it had, as of the end of September, hedged forward 340,528 tonnes of sugar for 2016-17, the equivalent of 38% of its own cane expected to be crushed during the season.

A year before, forward hedging (for 2015-16) had accounted for a more modest 136,150 tonnes, equivalent to 14.4% of the group's forecast cane crop at the time.

The extent of the hedging reflects in part the potential for a rise in cane output next year, with the recent rains which have slowed cane harvesting and processing boding well for yields ahead.

"Rainfall was very good this year," supporting prospects for a "major volume of sugar cane for the next crop year", Felipe Vicchiato, the Sao Martinho finance director, told investors.

"Given the rainfall and the condition of our fields, we have a very interesting volume to be crushed" in 2016-17, he said

Indeed, it could end up "almost exceeding our installed capacity" for processing.

'Never know what will be the surprise'

Hedging has also been encouraged by higher prices, with a rise in futures markets, plus weakness in the real, giving a double boost to values for Brazilian producers.

Presented with an "interesting" margin for 2016-17 of some R$400 per tonne – given a sales price of some R$1,200 per tonne and cast costs for Sao Martinho of about R$1,200 per tonne – the group had decided to opt for safety and lift hedging.

"We never know what will be the surprise coming from the northern hemisphere in terms of sugar and incentive of some governments for sugar exports such as India," Mr Vicchiato said.

"So it's more a prudential measure in trying to lock in an interesting margin for the next year, more than having a totally different view than the one that we had last year," when the rate of hedging was lower.

Profits, revenues rise

Data on Raizen Energia were released in results for the July-to-September quarter from Cosan, which owns half the business, the other 50% being owned by Royal Dutch Shell.

Raizen Energia's revenues for the period rose 24% on an underlying basis to R$2.9bn, let by growth both in sugar values, in real terms, and in sales volumes.

The increased volume sales saw Raizen Energia sugar inventories fall by 11.5% year on year to 1.40m tonnes as of the end of September.

Ethanol stocks were, at 921,000 tonnes, down 14.9% year on year.

Underlying earnings before interest, taxation, depreciation and amortisation (ebitda) rose by 20% to R$837.0m.


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