Brazil’s credit/indebtedness issues will curb short term and particularly long term investment
Brazil’s rising ethanol demand will provide a floor for the market but also provide a ceiling as demand shifts and financially stronger mills invest in more flexibility.
Brazil’s discovery of pre-sal oil reserves could complicate the ethanol industry or will the problems of BP complicate the pre-sal development?
The predominant growth regions for consumption moving forward will be Asia with 60% of the world population (young and growing) and the middle east which also has a young population and no significant production.
Production investment in Africa will impact the world market and not just Europe within a year or two.
Current to three months; We see the market finding support at current levels and a possible recovery to higher levels. So 13.00-17.50 cents. However the weak credit situation of the mills will be a potentially large negative as fixation for October is limited and if there is no adverse weather throughout Brazil’s harvest then 15.00 cents could be a price cap and a potential move down to 12.50-10.50.
2. Three to six months: If the harvest in Brazil runs with normal or less than normal rain delays and the macro situation continues under pressure the chances increase that prices will be pressured to lower levels. The Brazilian currency could come under more pressure thus prices could fall to 11.50-9.50 or basically from where we started the rally which is not unexpected given past history.
3. Six months to a year; If prices don’t recover then expect Brazilian sugar production to stagnate or decline as investment is curbed by the financially weaker mills. Indian mills as well will This will hasten the process of consolidation but also lead to higher prices 6 months to a year. Therefore prices could spike again to reach 18.00-20.00 again or higher.