Sao Martinho lifted its earnings despite a dip in cane volumes as it tapped into higher prices of sugar and, especially, of ethanol which reined in Brazil before being undermined by a drop in gasoline values.

Sao Martinho, one of Brazil’s biggest cane processors, said that it crushed 7.81m tonnes of the crop in the April-to-June quarter, a decline of 10.5% year on year, reflecting damage from adverse weather last year.

The group said that “the decline mainly is explained by the effects from weather events… such as drought and frosts” as hit cane crops in Brazil’s key Centre South region in July last year.

In the Centre South region as a whole, cane processing volumes

Ethanol vs sugar

Nonetheless, Sao Martinho reported earnings up 16.6% at R$221.6m for the April-to-June quarter, on revenues up 29% at R$1.71bn, as higher prices of ethanol and sugar made from the cane more than made up for the lower processing volumes.

Indeed, the ethanol price that the group achieved during the quarter, at R$3,799 per cubic metre, was up 30% year on year, outpacing a 13.8% increase to R$1,884 per tonne in the sugar price, and encouraging the conversion of more cane into biofuel rather than sweetener.

Sao Martinho processed 56% of its cane into ethanol during the period, up from 52% a year before, although in-line with the average for Centre South mills, as shown by data from industry group Unica.

Combined with the higher price, the increased stress on ethanol output drove the company’s revenues from ethanol up 83% year on year, to R$1.04bn.

By contrast, sugar revenues fell by 18.6% to R$1.88bn, “explained by the decisions to prioritise ethanol in the production mix”.

Ahead of the dip

Brazilian ethanol prices remained high during the quarter, with values of hydrous ethanol, as used by flex fuel cars, reaching R$3.8401 per litre in April, just shy of the record of R$3.8918 set in November, according to research institute Cepea.

Brazilian prices of anhydrous ethanol, as blended into gasoline, reached R$4.2295 per litre, the fifth highest weekly price on record, according to Cepea, which estimates the high at R$4.5353, also recorded in November.

However, values have fallen significantly since, to R$2.8635 per litre for hydrous ethanol and R$3.3764 per litre for anhydrous, depressed by cuts to prices of gasoline by Petrobras, the state-run energy giant.

Petrobras last month cut gasoline prices twice, by 5% then 4%, saying that international benchmark prices had “stabilised at a lower level for gasoline”, as economic fears pulled energy markets back from highs made earlier in 2022.

Petrobras has also faced political pressure to cut fuel prices, and curtail inflation in Brazil, which faces a general election in October.

Sugar prices, by contrast, have suffered smaller falls, with Sao Martinho noting that “the sugar price curve has been presenting prices at resilient levels”.

It explained this stability as “mainly due to the favourable supply/demand scenario for the product”, with Brazilian values also gaining support from some depreciation in the real, which boosts the value in local terms of assets traded internationally in dollars.

Broker reaction

The results for what is the first quarter of Sao Martinho’s financial year were viewed by XP Research as showing a “strong start”.

The group had made “a solid beginning for the year due to higher commodity prices, despite lower yields”, XP analyst Leonardo Alencar said.

However, Mr Alencar added that the broker was maintaining a “neutral” rating on Sao Martinho shares, with a target price of R$42.80, as “due to an outlook of lower prices for sugar and uncertainty for ethanol, we see the best moment already priced-in”.

BTG Pactual, noting that “since the start of the current quarter, ethanol and sugar prices are down 14% and 3% respectively”, said that it expected “more downward pressure after recent Petrobras gasoline price cut announcements”.

Nonetheless, the broker kept a “buy” rating on Sao Martinho shares, with a target price of R$51.00, saying that the group “remains a premium, top-notch company in the sector and we believe it remains a solid play in case cane yields recover and sugar and ethanol prices become again more predictable”.