Sao Paulo, Sept 4 - Brazilian sugar and ethanol producer Cosan has hedged less than 30 percent of its planned 2010/11 sugar production but expects to expand hedging if prices stay above the historical average, an executive said.
"We started to hedge sugar for next crop as prices rose. However there's still a substantial percentage from next harvest still to be hedged (on futures markets)," Cosan's Financial Director Marcelo Martins told Reuters.
Sugar futures have jumped to their highest in nearly three decades mainly due to a steep drop in output in India, which has turned from a net sugar exporter into a net importer.
A lower-than-expected output due to excess rains this season in Brazil, the world's top sugar producer and exporter, have also supported the rise in prices.
From the current crop, whose harvest will finish in December, Cosan has hedged more than 80 percent of its output. The company just recently accelerated hedging as of late June, when it had around 50 percent of the current crop covered.
The group's sugar production in 2009/10 will total 4.2 million tonnes. It has 21 sugar and ethanol plants in Brazil, and two more mills will come online later this year.
The company is able to divert between 55 and 60 percent of its cane crush to sugar production, a far higher rate than the 40 to 45 percent on average in Brazil's cane sector. The rest of the cane crush goes to ethanol production.
Historically high sugar prices have raised the price of existing milling assets in the sugar industry, Martins said, slowing consolidation in the highly indebted sector. Martins said was difficult to see assets' actual prices as no deals have been closed recently.
The financial standing of the sector is especially fragile this year, after the credit crunch resulting from the global financial crisis crippled groups that had leveraged to expand.
Companies have been seeking buyers or filing for bankruptcy protection, and a wave of consolidation is expected to unfold.
"Higher sugar prices may not be a solution for most of these companies but certainly perspectives have improved since last year. So, more mills are available and they are expecting higher prices," he said.
DIVERSIFICATION
The group, which has 70 percent of its capital on the hands of foreign investors, plans to get more financing from banks instead of tapping capital markets to bolster cash position.
In doing so, Cosan, which has until recently used mainly the capital markets to raise money, aims to reduce reliance on one source of financing and also could use sugar export flows to back collateralized loans, Martins said.
After growing swiftly in past years, mainly through buying sugar and ethanol rivals, Cosan sees investments in businesses outside its core activity of producing sugar and ethanol continuing in the coming years.
Areas such as logistics, biomass electricity generation through the burning of cane bagasse and fuels distribution are expected to account for 50 to 60 percent of the group's EBITDA -- earnings before interest, taxes, depreciation and amortization -- by 2012.
"Our aim is to make cash generation more predictable in a company that is highly dependent on a commodity," Martins said. "We also want to create synergies between activities."
Cosan bought Exxon Mobil's filling station assets in Brazil in 2008. Before that, nearly all cash flow came from sugar and ethanol sales.
One of its biggest projects is a partnership with Brazilian railway transport firm America Latina Logistica to expand rail freight capacity to Santos, Brazil's main port. Cosan's investments in the project are nearly $500 million.
The group is also investing heavily in biomass power generation. Cosan expects to have a capacity to generate 800 megawatts of energy by 2011/12. It could be expanded to 1.2 gigawatts, depending on market conditions.