BRAZIL: Rabobank says ethanol parity has lost relevance

Published: 04/04/2018, 7:56:45 AM

Ethanol parity "has lost relevance" as a floor for world sugar prices, in a sign of Brazil's reduced market grip, Rabobank said, as it hiked its forecast for the global output surplus this season, and forecast another one ahead, according to Agrimoney.

The bank echoed other commentators in forecasting a drop of "4.0 million-5.0 million tonnes" in sugar output from Brazil's key Centre South region in its 2018/19 crushing season, which started on Sunday.

"There is a broad consensus that the Centre South cane crop in 2018/19 will weigh in at around 585 million tonnes," Rabobank said, noting too expectations of cane yielding 134 kilogrammes of sugars per tonne, and with 41-42% of cane used to make sweetener rather than ethanol.

Last season, mills turned more than 46% of cane into sweetener.

Last week, analysis group Green Pool forecast Centre South sugar output of 32.0 million tonnes in the newly-started season, down from 36.1 million tonnes in 2017/18, with broker Intl FCStone putting the 2018/19 figure at 31.5 million tonnes.

Nonetheless, despite the prospect of a cut in Brazilian output Rabobank, in its first forecast for the world sugar supply and demand balance in 2018/19, pegged it at a surplus, of 4.3 million tonnes.

The forecast of a further output surplus - after a production excess the bank pegged for 2017/18 at 7.6 million tonnes, a 3.3 million-tonne upgrade - indicated the waning power over the market of Brazilian dynamics.

The South American country was "apparently unable to solve the global supply and demand imbalance on its own" by curtailing sugar output, typically achieved by switching more cane to producing ethanol.

Such a switch is incentivised financially by the price of sugar prices trading below the so-called "ethanol parity" - the level at which mills have equal financial incentive from making either the sweetener or the biofuel from cane.

"Ethanol parity has lost relevance as the traditional indicative floor for sugar prices during the Centre South [cane] harvest," Rabobank said, adding that this was "hardly a development to calm the nerves in a sinking market".

Historically, the fall in sugar prices to levels significantly below ethanol parity, as currently, have offered reassurance to investors of a curtailment of supplies closer to demand.

Instead, focus in world markets has turned to the growing expectations for India's production, which has come nearer availability to the world market with the removal of a 20% export tax.

"The question now is whether a sugar export subsidy may also be tabled, given that current world sugar prices imply a US$130-US$150 per tonne loss on exports."

Rabobank upgraded by 4.0 million tonnes to 31.7 million tonnes its forecast for Indian sugar output in 2017/18, "a 49% upswing from last season's 21.3 million tonnes," and above even lofty estimates from many other commentators, with Green Pool, for instance, pegging the figure at 29.6 million tonnes.

Trading house Marex Spectron on Tuesday said Indian output looked to be "knocking on 31 million tonnes".

The estimate for Thai output was raised by 900,000 tonnes to 13.5 million tonnes, with the forecast for European Union production in 2017/18 also upgraded, by 400,000 tonnes to 20.9 million tonnes, "26% higher than the year before and a whopping 3.4 million tonnes above the five-year average".

For 2018/19, the bank said that "contrary to some expectations on lowering the beet area, which were based on unfavourable global market dynamics... we expect the EU beet area to remain similar in size compared to last year", in the face of "sustained low prices" of grains, key alternative crops.