Wednesday, May 16, 2007

Brazil Sugar, Ethanol Market Agonized Over Dollar, NY Prices


Tue, May 15 2007, 22:10 GMT

Brazil Sugar, Ethanol Market Agonized Over Dollar, NY Prices

SAO PAULO (Dow Jones)--Local traders on Brazil's sugar and ethanol
market agonized Tuesday over two simultaneous shocks: New York sugar
prices plunging to their lowest point in two years and the weakest U.S.
dollar rate against the Brazilian real since 2001.

Most traders agreed they were bracing themselves for still-lower New
York sugar prices and dollar rates in coming weeks.

"It's like standing in front of a train," said Antonio Augusto Duva, the
manager of the soft commodities desk at the Sao Paulo office of French
bank BNP Paribas.

Growing pessimism about a world sugar glut - not least within leading
producers Brazil and India - sparked a sell-off on Tuesday in New York
Board of Trade sugar contracts. The July contract plummeted 46 points to
end at 8.65 cents a pound, while October dropped 41 points to 9.00 cents.

To make matters even worse for Brazil, the world's leading sugar and
ethanol exporter, the U.S. dollar on Tuesday ebbed below the
psychologically important 2-reals-to-the-dollar level to BRL1.98 per dollar.

In one day, the Brazilian currency gained 1.4% against the dollar. So
far this year, the real has climbed about 7% against the dollar, after
rising nearly 9% in 2006.

"It's terrible," said Eduardo Correa, the commercial manager of a key
Brazilian sugar and ethanol group, Equipav. "At these levels, we're well
below costs of production - and Brazil is the world's lowest-cost
producer of sugar too."

Local traders generally added that they had been expecting the fall in
New York sugar prices and the Brazilian real for weeks.

"We all knew this was coming - I've been saying this for weeks," one Sao
Paulo trader said.

Effects On Brazil's Market

Brazil's physical sugar export market is suffering from an absence of
raw VHP sugar, since local millers have generally been favoring ethanol
output over sugar production, and the domestic market over the export
market, said local traders.

All signs continue to point to sinking domestic sugar and ethanol prices
as more Brazilian center-south mills enter the harvest.

By Friday, 145 mills out of Brazil's 270 center-south sugar and ethanol
mills had started harvesting for the 2007-08 season (May-April), the
Union of Sugarcane Industries, or Unica, said Tuesday.

Local traders added that some regional mills started the harvest, then
stopped because of delays in equipment deliveries or regional rains.

Despite the slower-than-expected start to the harvest, Brazilian
benchmark domestic color-150 icumsa sugar prices have already dropped
about 13.8% in the past three weeks to BRL28.51 per 50-kilogram bag on
Tuesday, as new supplies have arrived on the market, according to the
local Cepea-Esalq index.

The price is a full 40% lower than the BRL47.80 quoted around the same
time a year ago.

Domestic hydrous ethanol prices at the Sao Paulo mill gate also dropped
13.8% Friday, compared to the week before, while anhydrous ethanol
prices sank 8%, according to the Cepea-Esalq index.

Even with the price drop, prices for anhydrous ethanol - at BRL0.98 a
liter, without taxes - are still 1% higher than the same period a year
ago. However, prices for hydrous, a gasoline substitute, are 12.4% lower
at roughly BRL0.75 a liter, without taxes.

As prices on the domestic market keep slipping, Brazilian millers will
be forced to turn back to the export market in coming weeks, or risk a
collapse in domestic prices, local traders said.

With such bearish fundamentals, most said they aren't expecting good
news any time soon soon.

"These prices are reflecting world sentiment about a sugar glut, and I
can see them staying around here for a few months," Correa said.

"New York prices might hold around 8 cents," Duva said. "Then again,
they might not."

Amidst all the bleak news, Brazil's domestic ethanol market - with its
booming sales of flex-fuel cars - will provide support for local prices,
traders said.

Still, "I see all states - not just Sao Paulo - using ethanol to fill up
their flex-fuel cars this season," one trader said.

Brazil is the world's leading sugar producer and No. 2 ethanol producer
after the U.S.

-By Grace Fan, Dow Jones Newswires; 5511 3145 1489;

(END) Dow Jones Newswires

May 15, 2007 18:10 ET (22:10 GMT)

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