NEW YORK, Jan 31 (Reuters) - Sugar producers’ hedging operations at the New York ICE exchange are down sharply from a year ago, as oil’s recent surge has spurred mills that also produce ethanol to delay hedging as they weigh boosting their fuel production.
According to U.S. Commodity Futures Trading Commission (CFTC) data, the volume of commercial players’ short positions - option contracts to sell sugar at a set price - is down 35% from last year, at around 420,000 contracts.
Less hedging means producers gearing for potentially more ethanol and less sugar production, which could mean smaller export commitments from producing countries in 2022 and lower global sugar supply.
Brazilian mills - which account for the bulk of short selling in New York - have hedged 52% of their likely 2022/23 (April-March) sugar exports compared with nearly 70% at this time last year, according to projections by Archer Consulting, a company which advises sugar producers on hedging strategies.
Right now, ethanol prices are near record levels in Brazil, following the surge in gasoline costs. That gives mills a greater incentive to shift more sugarcane to ethanol production.
“They are in no rush to hedge. They look at sugar forward prices on the screen and see that returns are very close to that of ethanol,” said Julio Maria Borges, a consultant to sugar and ethanol makers in Brazil.
Borges said it was still not a clear signal for mills to decide whether to produce more sugar or more ethanol when the new crushing season starts in April, so they were waiting, but a further rise in fuel prices would lead to more ethanol production.
Plants have flexibility in how they earmark cane to one product or another, depending on market prices. Mills used 45% of the cane to make sugar this season, according to industry group Unica.
Analysts estimate that a one percentage point shift from sugar to ethanol represents around 700,000 tonnes less in sugar production in Brazil’s centre-south.
An executive working for a large sugar trader said profit margins of sugar and ethanol production were nearly equal, which could make mills shift to producing more of the biofuel as it is a very liquid market with outright payment, while payments for sugar exports take longer. (Reporting by Marcelo Teixeira Editing by Tomasz Janowski)
