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Sao Martinho slows sugar hedging, foreseeing continued price revival

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Sao Martinho, the Brazilian cane processor, revealed a sharp slowdown in its forward sales of sugar amid expectations of higher prices ahead, even as it revealed an upgrade to its own production prospects.


The Sao Paulo-based group revealed that for the current crop year it had sold forward sugar to the equivalent of 70% of output in sugar cane terms, down from a comparable figure of 83% a year ago.


For the 2018-19 season, which starts in April, it had sold forward less than 90,000 tonnes, equivalent to 8% of its own sugar cane – compared with a year-ago equivalent of 35%.


The price of sugar sold for next season, at 16.04 cents a pound, was well below the 20.06 cents a pound it achieved a year ago on equivalent terms.


Indeed, the company said that its hedging strategy, combined with improved operating rates, mean that the “sharp fall in sugar prices in 2017 will impact Sao Martinho’s results only marginally”.


‘Sugar prices to keep recovering’


Sugar prices are indeed, poised to extend their recovery, as relatively attractive prices of ethanol see more cane turned into biofuel than sweeteners.


“For the 2017-18 crop year, prices have been recovering in recent weeks and we believe the trend will be maintained,” the group said.


“Ethanol’s improved profitability should encourage a more balanced sugar-ethanol mix from the start of the next crop year, which is a fundamental factor for supporting sugar prices.”


Sales vs stockpile


The comments came even as Sao Martinho upped its forecast for cane products in 2017-18, citing a better-than-expected so-called TRS – the level of sugars in cane – which had come in at 139.3 kilogrammes per tonne of cane, beating the forecast by 5.8 kilogrammes.


“The better TRS reflects the dry weather observed in the last quarter, coupled with the rapid recovery in our sugarcane fields after two seasons of adverse weather.”


In fact, Sao Martinho said it had aimed most of the extra sugars at making ethanol, with the forecast for sugar output in 2017-18 raised by only 7,000 tonnes to 1.41m tonnes.


Indeed, the proportion of cane expected to be directed at sugar was, at 48%, down 1 point on the initial estimate, and down 6 points on last season’s result.


Market reaction


The comments came as the group unveiled a 23% decline to R$53.0m in earnings for the July-to-September period, reflecting a drop of 5.5% to R$736.3m in net revenues, as the group slowed sales at a time of weak market conditions.


Sugar sales during the quarter dropped 12.5% by volume year on year, to 286,600 tonnes, as Sao Martinho allowed its inventories of the sweetener to soar to 565,886 tonnes, up 22% on the year-ago total.


The results were termed “positive” by BTG Pactual, which restated a “buy” rating on Sao Martinho shares, with a price target of R$24.00.


The cane processor “may be gearing up to become a strong dividend play”, the broker said, while adding that “supply/demand still points to a normalised sugar price of about 17 cents a pound, with risks to the upside” from the potential for mills to shift output further towards ethanol.


Sao Martinho shares stood 0.1% lower at R$17.89 in morning deals in Sao Paulo.

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