LatAm Agribusiness
Sugar Price in the Sweet
Spot; Timing Is Wrong on
Ethanol; Initiating Coverage
We expect sugar to remain very profitable until 2011,
and ethanol unprofitable until end 2009. Sugar
prices have increased 43% YTD, and we expect them to
rise another 6%, reaching US$0.18/lb in 2009/10.
Ethanol prices have decoupled from sugar and are not
profitable at this moment; we expect them to increase
again only in 2010. Based on our sugar and ethanol
price forecasts, we favor companies with higher
exposure to sugar. Guarani is our top pick.
Where we differ: We have a supply/demand model
and forecast cycles (neither are common in sugar equity
research). Morgan Stanley has developed a model with
50 years of data from 30 key countries.
Flexibility is the name of the game: We prefer
companies with greater capacity to shift between sugar
and ethanol, and do not like pure ethanol mills. Sugar
and ethanol prices are correlated, but they frequently
decouple from each other. The best way to play the
cycles is to have greater shifting capacity.
Cogeneration is not yet the ‘theme of the future’:
We like cogeneration (electrical generation from
sugarcane production), but it is still in the early stages of
development, with uncertainties ahead. We think many
investors are overly optimistic about cogen near term.
Where we could be wrong: Weather, FX, and the oil
price affect sugar and ethanol prices. Ethanol could
revive, improving the fortunes of ethanol pure plays.
High auction prices could make cogen’s IRR better.
How to play the industry: Guarani has the cheapest
stock and the best earnings momentum due to higher
sugar exposure. We prefer to play Cosan via Cosan Ltd.,
as the gap between shares of the holding company
(Cosan Ltd.) and operational company (Cosan SA) has
widened significantly in recent weeks. São Martinho has
already reached fair price.