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Sao Martinho flags 'asymmetry' in sugar price prospects

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The relatively low risk of a retreat sugar prices lies behind Sao Martinho's decision to cut back on forward sales of the sweetener, in contrast to the strategy followed by some peers, chief executive Felipe Vicchiato said.

The came processor reduced to 50% the proportion of following-season sugar production it had hedged as of the end of December last year, down from 64% at the close of 2014, as Agrimoney.com highlighted on Monday.

Louis-Dreyfus controlled competitor Biosev, the world's second largest cane crusher, has taken the opposite approaching, lifting to 74% the proportion of its forecast production for 2016-17 already hedged, against a comparative figure of 36% a year before.

However, Mr Vicchiato said that Sao Martinho's approach was down to "asymmetry" in the current market compared with that a year ago.

He viewed New York futures as having relatively low downside risk at current levels, of 13.17 cents a pound on Tuesday on a spot contract basis, despite their revival from an August low of 10.13 cents a pound.

'Issue of asymmetry'

Sugar futures nonetheless remain below levels of 16 cents a pound touched early in 2015.

"With a 16-cents-a-pound price, there was a bigger chance of the sugar price dropping than today, at 13 cents a pound," Mr Vicchiato said, flagging an "issue of asymmetry".

"The chance of this dropping last year was much bigger than the chance of it dropping now."

The comments reflected in part an expectation that Brazil's currency, the real, will stabilise on foreign exchange markets, with Mr Vicchiato saying that "we do not believe that there is much room" for further depreciation against the dollar.

Given the importance of Brazil in world sugar production, the weakness of the real has been a big factor in cutting values of sugar in dollar terms.

Sugar vs ethanol

Furthermore, he foresaw support from the ethanol market too which, given that mills can either make sweetener or biofuel from cane, would feed through into support for sugar prices.

"We believe that the ethanol demand has gone to the next level, and we could have a positive surprise in terms of the mix between ethanol and sugar for the next crop year," he said.

Thus dynamic would mean "reducing the availability of sugar and maybe sustaining the prices of sugar at a better level.

"Ethanol consumers in Brazil are generating a higher demand than everybody expected."

Sugar level outlook

He also forecast a return to "normal levels" in the sugar content in cane, an important determinant of mills' sugar and ethanol output, after two years of diverging results – with a high concentration in the 2014 crop, and low level last year.

Levels are typically depressed by excessive rain, which is seen as "diluting" sugar concentrations, and encouraging cane plants to use up energy reserves for growth.

"So the TRS [sugar concentration] of 2014-2015 was certainly an outlier, outside the curve, but the TRS for 2015-2016 was also an outlier, but on the opposite direction, it was too low," Mr Vicchiato said.

"What we believe is that in the next crop year… we should go back to normal levels historically, something around 135 or 136," as measured by kilogrammes of sugar per tonne of cane.

"We are talking about a 5%, 6% gain" year on year.

A return to 141.6 kilogrammes of sugar per tonne of cane, as seen two years ago, "will only happen if the weather is too dry during the whole crop year".

By Mike Verdin

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