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Blitzkrieg on agribusiness: what to expect?

The global population has been facing a "blitzkrieg" in 2020 brought up by an invisible enemy, the SARS-CoV-2 coronavirus, which causes covid-19. We are living an unprecedented situation, which requires an intensification of analyses and research so as to identify the adjustments to be carried out while making up public policies, both for the health sector and for the resulting socioeconomic effects.


A source of concern regarding potential changes induced by the pandemic is the possibility of a trade cutback among countries by applying protectionist measures. Such reaction has been observed in previous global crises, and the current scenario may deteriorate within the prevailing circumstances. In the past few years we have noticed an undermining of the WTO - World Trade Organization's capability in curbing protectionism, the trade wars between USA and China, setbacks in globalization, and regional trade boosts.


In spite of the negative forecasts in these fronts, it has been considered that Brazilian agribusiness is not only capable of withstanding the crisis but is likely to emerge in even better shape.   Nonetheless, positive agribusiness results may not be sufficient to maintain a solid balance among the different segments of the sector, due to their variable traits. The sugarcane sector, for instance, had its 2020/2021 harvest prospects completely thwarted.


The expectations were that, after a decade of overcoming the issues risen during Dilma Roussef's administration, the harvest could finally evolve while leveraged by a conjunction of positive aspects. Ethanol consumption had been reaching high levels, with the brent type oil barrel at a sufficiently high price to hinder gasoline's competitiveness compared to biofuel. Also, weather conditions favored sugarcane yield so as to confirm that this would in fact be the year of the comeback.  With the dollar at R$ 4.3, a major portion of Brazilian sugar yet to be produced was sold, due to a quite timely strategy, seeing as, in but a few weeks, the positive value drivers for the sector came to an inversion on account of the pandemic's spread in Asia.


It is believed that, at least in the short-term, the trade balance should have negative trends for ethanol compared to sugar. People staying home combined with international oil price plummeting have dramatically reduced biofuel consumption. Over the last decade, ethanol sales became the major cash flow source for mills. Within the current settings, companies' management must adapt to this new reality.


In 2019, approximately 60% of the sugarcane harvested in the Mid-South region followed to ethanol production because of the low international sugar prices. For the harvest at hand, the best short-term alternative seems to be storing the product to prevent "liquidation prices", with aim to maintain market share. Sector leaders have been working jointly with government authorities towards the implementation of a suitable policy that could mitigate damages that low prices could have on the sector. It has also been observed that approximately 30% of the units milling sugarcane in Brazil only produce ethanol, which is something that needs to be accounted for within the assessments as to product prospects and market price.


As for sugar, the major price drivers for Brazilian sugar today are six: (i) global commodity stock, (ii) currency exchange rate, (iii) oil prices, (iv) weather conditions, (v) government regulations (vi) consumption trends.


With respect to the stocks, the higher they are, higher the negative pressure over prices. Since the 2016/17 crop, stocks have been building up in the global scenario, reaching record volumes, over 65 million tons--a trend that would be inverted for the current harvest, with analyses indicating a deficit of approximately 10 million tons in the international market. This was being regarded with great enthusiasm by the sector, seeing as the global stock level is a key factor among the major sugar price drivers. In fact, this element affects all commodities. For sugar, low stock levels indicate a boost in demand, low production, or both. For sugarcane-derived sugar, the effect could be substantial because production periods involve a relatively long cycle in producing nations.


As of early March, however, variables changed towards discouraging Brazilian sugar exports, with exception to the exchange rate, which reached the nominal record of R$ 5.9 million in mid May. Foreign sugar quotations returned to the level of US$ 10 cents per pound as a new period of risk emerged in financial markets. 


The effects of the third driver, oil prices, already mentioned above, resulted in a challenging phenomenon for the major economic players. Changes in the mix became favorable to sugar, following the excitement aroused by the leap in prices. In turn, weather conditions favored Brazilian productivity while crop failures in Thailand--a major sugar producer--, due to lack of rain, were considered additionally positive to Brazil's sugar and fuel performance for this crop.


At this point, inferences about government regulations and, in particular, consumption, which are also important drivers, do not seem to have a well-established basis for interpretation. With the global development of covid-19, agricultural commodity markets have undergone severe instability, exposing producers to a single certainty: a good deal of the demand expected for Agro products could be reduced, and the stabilities of the supply chains now hang by a thread. It's time for rolling up our sleeves and learning to deal with the losses, which can nonetheless still be coped with effort and responsibility.

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