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SAO PAULO, Nov 6 (Reuters) - Brazilian sugar and ethanol producer Cosan expects prices for sugar to rise in 2015 and supplies to turn tighter, ending several years of oversupply, the company’s chief executive, Marcos Lutz, said on Thursday.
Approaching the final weeks of the 2014/15 crushing season, Cosan has hedged 18 percent of its expected sugar output of the 2015/16 crop. And the prices it has locked in are superior to those it has secured for sugar now in stock, Lutz said.
Although high levels of hedging by sugar producers is often interpreted as a sign markets are prone to fall, the level of hedging on the futures market that Cosan has done for next year’s crop seems to show a more bullish sentiment for sugar.
By comparison, heading into 2012 when sugar prices were forecast to fall from a multi-year high in 2011, Cosan had locked in prices for more than 80 percent of its expected sugar output as a hedge against weakening prices.
Lutz added the spread between October futures prices and March futures last quarter prompted the company to hedge most of this crop’s sugar output now in warehouse, locking in gains as the 2014/15 season crushing comes to a close.
The company said in its third quarter earnings report on Wednesday it had amassed stocks of 1.58 million tonnes of sugar from the current crop, 45 percent greater than last year on Sept. 30, on expectations prices will improve.
“It more than compensates us to pay the cost of carriage for product in stock for a few months,” Lutz said, referring to the spread between recent spot prices and March futures.
Lutz said the company had fixed nearly all the sugar in stock at an average 42.74 reais for a 50-kg bag equivalent, after converting the international price into local currency terms.
“We have fixed prices for next year’s sugar already at better prices,” Lutz said adding that 18 percent of the new crop’s sugar has been fixed at an average price of 46.30 reais per bag.
Lutz said the poor returns from ethanol in recent years had forced Brazilian cane mills to churn out as much sugar as possible, contributing to the global glut in the sweetener.
Growth in global demand for sugar has been supplied without new investment in capacity in Brazil, the world’s main producer, Lutz said. In fact, local mills have slashed investment.
Cosan and other major milling groups are stocking ethanol as well and analysts expect returns from the biofuel to be more attractive in the coming year.
The drought that has decimated the current crop this year to an estimated 545 million to 560 million tonnes from 597 million the year before will have lingering effects.
“Next year’s crop will be rather similar to this year‘s. I don’t see a big recovery,” Lutz said. Many analysts have expressed similar sentiments about the new crop that officially starts crushing in April. (Reporting by Gustavo Bonato and Reese Ewing, Editing by Franklin Paul, Chizu Nomiyama and Chris Reese)