SAO PAULO, Sept 11 (Reuters) - Some Brazilian mills have canceled sugar delivery contracts with commodities traders at a cost, an operation known in the market as washout, as New York raw sugar futures touch contract lows and make ethanol even more attractive, millers and analysts said.
Historically, Brazilian mills produce more sugar in the second half of the year, when sugar content increases in late-harvested cane due to dryer weather. But this year, as prices fail to recover, they are keeping the focus on ethanol production, cancelling sugar delivery contracts when possible.
“There is a surprising volume of washouts in Brazil’s center-south currently,” said Arnaldo Correa, from Archer Consulting, who advises mills on sugar pricing.
He said some of his clients had told him about their cancellations, but Correa declined to name them due to confidentiality agreements.
Mills are only able to buy back contracts when provisions for that have been added to the agreements before signing.
Correa said mills usually pay a fee to cancel physical delivery of the sugar. They end up making more money diverting that cane from sugar to ethanol even if they have to pay a fee and that justifies the washouts, he added.
One mill that confirmed cancellations was Bevap Bioenergia, located in Minas Gerais state where ethanol demand has been strong in the last two seasons.
Leandro de Menezes Martignon, Bevap’s commercial director, said the mill wanted to increase its production mix towards ethanol, so it decided on the cancellations. The plan is to allocate up to 75% of the cane to ethanol production, compared with 70% currently, leaving only 25% for sugar production.
“We bought back that sugar position from the trader. Ethanol is paying 200 points more than sugar right now, so it’s worth it,” he said.
New York’s front month sugar contract was trading at a contract low of 10.82 cents per pound on Wednesday.
Martignon added that as the season nears the end around November, ethanol prices should rise further, potentially increasing its price advantage over sugar.
Joao Paulo Botelho, sugar and ethanol analyst for broker and consultancy INTL FCStone, said mills would try to focus as much on ethanol as possible.
“If they have the option to buy back their sugar positions, they will do it. There are several cases,” he said.
The latest by-weekly crop report from sugar group Unica showed mills are allocating an even smaller amount of cane to sugar production than last year, which was an all-time low at 35%. (Reporting by Marcelo Teixeira; Editing by Mark Potter)