Some companies even consider making investments to ensure greater sugar production in the next harvest
01/16/2023
Uncertainties about what the Lula administration’s policies for fiscal balance, monetary policy, fuel pricing policy, and fuel tax policy will look like, in addition to doubts about the direction of the foreign exchange rate, are causing concern among sugarcane mills. As these factors tend to impact the ethanol market more immediately, sugarcane mills are already indicating that they could prioritize sugar production as a safe haven three months into the new harvest (2023/24).
According to Willian Hernandes, partner at Ribeirão Preto-based consultancy FG/A, there are even mills considering making investments to ensure greater sugar production capacity already in the next harvest, if necessary. “This [political] indecision is bad for [business] decisions. In this current tax scenario, making adjustments for sugar production to become larger is eminent,” he said.
An investment like this, however, can only be translated into effective production increase in at least six months – that is, if an investment decision is made now, it will only be reflected in increased sugar production from July on, at least, according to Ricardo Pinto, a partner at consultancy RPA.
As there are still many mills with idle capacity, this capacity may be filled by directing the largest supply of cane to sugar. But the capacity to reduce the ethanol supply is limited, says the consultant. “It is difficult to have big changes in volume only with mix adjustments.”
The record sugar production in the South-Central region was 38 million tonnes in the 2020/21 harvest, when the pandemic broke out, hitting the fuel market hard. At the time, the mills ended up directing all their production to sugar, for which there was still some demand. The two following harvests were shaken by drought and frost, but the consultants expect a resumption of the cane harvest in 2023/24.
The climate of uncertainty grew after the government published the provisional measure 1,157/2023, which postponed for two months the federal tax relief on fuels to allow time for reviewing the pricing policy. It is not known whether, after these two months, ethanol will recover the same special rate compared to gasoline as before the tax changes – as foreseen in the constitutional amendment approved last year – nor if and what will be the level of gasoline price control by Petrobras under future CEO Jean-Paul Prates.
The biggest fear of the mills is a repeat of what happened under President Dilma Rousseff, when domestic gasoline prices were kept well below international levels, which were high at the time, making it difficult for hydrous ethanol to compete at the pumps – and even affecting the sugar market because of the preference of mills to produce more of the sweetener.
An executive from one of the largest companies in the sector, however, told Valor on condition of anonymity that there may be an intermediation with Mr. Prates’s proposal for a price stabilization account. The alternative, however, still holds uncertainties and is expected to take a while to consolidate, creating a cloudy horizon in the first months of the harvest.
The mills are still studying whether to file a lawsuit against the federal government in case the tax relief is extended. But a normalization of the tax policy is not likely to change the scenario either. “Even if taxes on gasoline are resumed, ethanol price is unlikely to be higher than sugar price,” said Tiago Medeiros, director of the trading company Czarnikow.
The uncertainty is also causing caution in hedging, which is within the historical rate for this time of year. At Czarnikow, 65% of sugar exports for the next harvest are hedged, and 10% of exports for the 2024/25 harvest as well.
“The hedge, as much as it is a protection, brings uncertainties related to the cost, to the total return of the business, considering an ethanol scenario maybe less interesting with price controls put in place by Petrobras. The result is inaction,” said Mr. Medeiros.
The demerara sugar future contracts traded on the New York Stock Exchange that foresee deliveries during the harvest period in South-Central Brazil (for July and October) have also shown less attractive prices than the mid-crop contracts expired last year.
*By Camila Souza Ramos — São Paulo
Source: Valor International