Sugar Rush as Brazil Millers Speed Up Sales to Boost Profit

Updated on
  • Raizen increased forward sales 10-fold in second quarter
  • Biosev sees prices boosting cash generation next season

Brazil’s biggest sugar companies are locking in sales at the fastest pace in years amid record domestic prices, boosting projected profits.

Raizen Energia SA, a Royal Dutch Shell Plc and Cosan SA joint venture and the country’s top exporter, said it sold 954,000 metric tons of sugar for delivery in 2017 as of June. That’s a 10-fold increase from last year, and the biggest volume sold that far in the future since at least 2010, according to Cosan’s earning reports. Louis Dreyfus Co.’s sugar unit Biosev SA, the second-largest producer, has already sold about 645,000 tons in advance, or 40 percent of its projected exports, up from virtually zero a year earlier.

The rush to sell comes as sugar futures in New York almost doubled over the past year with global demand in the next season seen outpacing production by the most since at least 2000. That’s a reversal of a four-year-long decline that slashed profits in the industry, causing about 50 sugar and ethanol mills in Brazil to close and 70 to file for bankruptcy since 2011.

Now, with the sweetener reaching a nominal record in July when measured in reais, companies that sold in advance will be able to post gross margins of above 50 percent in exports in the season starting in April, twice as much as current levels, said Arnaldo Luiz Correa, a partner at Archer Consulting.

"It has been an unmissable opportunity," Correa said in a telephone interview.

About 4.3 million tons of Brazilian sugar for delivery in the local harvesting season starting April 2017 were already priced by mills in U.S. future markets as of the end of July. That corresponds to about 16 percent of projected exports, which makes it the fastest sale pace since at least 2012, when Archer started monitoring those transactions.

"Prices are very attractive, signaling robust cash generation," Rui Chammas, the chief executive officer of Biosev, said in a telephone interview. The company is studying options that include the addition of capacity at current plants, allowing it to divert more cane to sugar production instead of ethanol as it seeks to take full advantage of favorable market conditions, he said. "This deficit cycle will still bring opportunities ahead of the harvest."

Sao Martinho SA, which usually starts selling its upcoming crop by September, had already sold 151,000 tons of sugar, or about 15 percent of its own cane production, for delivery in 2017 as of June 30. The amount was sold at an average price of 19.33 cents a pound, the company said in a filing on Aug. 8. Sugar for October delivery fell 0.7 percent to 20.52 cents a pound in New York. The futures contract has climbed 40 percent this year.

Future M&A?

The improved outlook for sugar has boosted shares of publicly traded producers in Brazil. Cosan, which also controls fuel distribution assets, has doubled over the past year, compared with the 26 percent gain for Brazil’s benchmark gauge. Biosev’s stock has also doubled, while Sao Martinho has risen 60 percent.

Cosan rose 3.3 percent to 37.78 reais at 3 p.m. in Sao Paulo, heading to the highest close since October 2014.

Selling sugar at current prices will enable top producers including Cosan and Sao Martinho to pay larger dividends and eventually make acquisitions, Credit Suisse analyst Viccenzo Paternostro said in an interview.

Brazil’s mills rush to sell may be a sign that the best rally among agricultural commodities has largely run its course as most analysts see sugar prices at their peak. Futures traded on ICE Futures are seen falling to 18 cents a pound in 2017, according to the median of analyst forecasts compiled by Bloomberg.

While a possible selloff by speculators in the U.S. futures market may send sugar prices down in the short term, the prospect of a widening global supply deficit combined with limited production expansion in Brazil should keep prices at attractive levels in the long term, Joao Alberto Abreu, Raizen’s sugar and ethanol vice president, said in an interview.

Reduced Debt

Higher sugar prices also offer hope for troubled companies including Tonon Bioenergia, which is under bankruptcy protection after defaulting last year.

"Margins will be high next year, and it will allow the company to reduce its debt," said Antonio Duarte, the manager at DGF Investimentos, the Brazilian private-equity firm that co-owns Tonon.

The real lost 33 percent against the U.S. dollar last year as Brazil slid into its worst recession in a century amid a corruption scandal and political crisis, boosting local prices for commodities that are usually traded in dollars in export markets. While the currency has recouped most of that lost ground with a world-beating 23 percent rally in 2016, it’s still 26 percent down from the past five years’ average.