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Rains, currency paint rosy outlook for Brazil sugar industry

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Brazilian sugar and ethanol companies are likely entering their best season in a long time, with favourable weather boosting new-crop prospects and an all-time low local currency increasing returns on exports.

 

Analysts have said 2020 could be a year of improvement for financially troubled mills hit by a long period of low global sugar prices and rising profits for more robust companies.

 

Ample rains in recent days in most cane-producing regions in Brazil’s Centre South should increase volumes to near record levels above 600 million tonnes in the new crop that starts in April experts said.

 

"This is the best raining season for the last seven years," said Celso Oliveira, agri-meteorologist at Sao Paulo-based Somar.

 

In some cane growing areas such as Piracicaba, in the main Sao Paulo state sugar belt, precipitation reached 215 millimeters so far in February, more than the average for the whole month (200 mm).

 

"And we’ve seen rains intercalated with periods of sun, which is ideal for cane development," he said.

 

Felipe Vicchiato, chief financial officer at Sao Martinho , a large sugar and ethanol producer, said the company was "looking to have a very positive crop,", adding that the group would likely increase cane crushing to near its capacity around 24 million tonnes per year.

 

Market conditions are favourable too. Sugar prices recovered in New York and the local currency, the real, is near an all-time low against the dollar, which could boost mills’ returns in local currency.

 

Julio Maria Borges, a partner at sugar and ethanol consultancy JOB Economia, said potential returns in reais from sugar exports surpassed those of local ethanol sales this week for the first time in the last three years.

 

"The game has changed," he said, indicating that mills currently would make more money producing sugar than ethanol.

 

Archer Consultancy’s Arnaldo Correa, who advises companies on hedging strategies, said this was a good time for mills to hedge their sugar exports linking their futures positions to NDFs (non-deliverable forwards) currency contracts negotiated locally, to lock in the currency gains.

 

Vicchiato said he saw a risk of higher sugar production in Brazil erasing a global deficit that has helped to stir prices.

 

Correa, however, said fuel consumption should surge in Brazil this year, around 5%, so the ethanol market will remain healthy, allowing mills to manage their production mixes between sugar and the biofuel.

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