Earnings Call Transcript - AGRO Q2 2022

Operator, Operator

Good morning, ladies and gentlemen. And thank you for waiting. At this time, we would like to welcome everyone to Adecoagro’s Second Quarter 2022 Results Conference Call. Today with us we have Mr. Mariano Bosch, CEO, and Mr. Charlie Boero Hughes, CFO. We would like to inform you that this event is being recorded and all participants will be in a listen-only mode during the Company’s presentation. After the Company’s remarks are completed, there will be a question-and-answer section. At this time, further instructions will be given. Before proceeding, let me mention that Forward-Looking Statements are based on the beliefs and assumptions of Adecoagro’s management and on information currently available to the Company. They involve risks, uncertainties, and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Adecoagro, and could cause results to differ materially from those expressed in such Forward-Looking Statements. Now, I will turn the call over to Mr. Mariano Bosch, CEO. Mr. Bosch, you may begin your conference.

Mariano Bosch, CEO

Good morning and thank you for joining Adecoagro's Second Quarter 2022 results conference. Before going into the results of the quarter, a brief update on our distribution policy. As you know, we have committed to distribute via a dividend and buyback a minimum of 40% of the net cash flow from operations generated in the previous year. In May 2022, we marked a milestone for Adecoagro as it was the first time in our history that we made a cash dividend payment. We paid out the first installment of $17.5 million, and in November of this year, we will pay the second installment. As announced, this will amount to a cash dividend distribution of $35 million, approximately $0.32 per share. At the same time, we continue buying shares under our buyback program and during the first seven months of the year, we repurchased 2.7 million shares totaling more than $20 million. Now going into the highlights of the operations, I would like to start with our sugar, ethanol, and energy business. During the quarter, adjusted EBITDA went up by 42% year-over-year, despite increasing costs. This was thanks to our commercial strategy, which enabled us to sell most of our production at peak prices. Two clear examples of this: One, we started the quarter with our tanks full of ethanol, and in April when ethanol prices hit levels 35% higher than sugar, we ended our tanks and even sold our day-to-day ethanol production. Second, in June, when domestic ethanol prices dropped, we exported part of our anhydrous ethanol to Europe and achieved an average premium of 15%. Exports are a possible outlet for our production because we have the necessary certifications and the industrial capacity to reach the alcoholic content required in Europe. It was because of our high degree of asset flexibility and our low sugar commitments that during the quarter, we were able to divert 80% of our total recoverable sugar (TRS) to ethanol, a product trading at a premium in our region. Maximizing ethanol production also allowed us to generate more catalog grades and to produce more vinasse, which is the sub-product used to produce bio fertilizers that we spread in our own fields. It is also the main input for our production of biogas. Regarding carbon credits, so far, we have reached $7 million in sales and secured prices as high as $40 per share. We expect to make $20 million in 2022, only from the sales of these carbon credits. As you know, the year started slowly in terms of crushing volume because we wanted to secure cane availability. We are now accelerating our pace to reach our crushing forecast for the year, which remains unchanged at roughly 11 million tons. We have entered the second semester of the year with good cane availability, and agricultural productivity indicators have fully recovered from the first frost event of 2020. We are also entering this semester with enough storage capacity to carry over our production until year-end if needed. Moving on to our farming business, harvesting activities of our crops and rice businesses related to the 2021-22 season are practically finished, totaling over 1.1 million tons of rice production. Adjusted EBITDA in our farming business presented a year-over-year reduction, partially driven by the solid results of 2021 when we captured high commodity prices and lower costs. This year, there was a mixed performance in terms of prices and yields. In the case of yields, for instance, rice, peanuts, and second crop corn were lower compared to the previous campaign. At the same time, the global inflationary environment led to an overall increase in costs in dollar terms, which pressured margins, including higher costs of agricultural inputs as well as higher logistics costs. These are the times where our constant discipline and strategy of focusing on increasing operational efficiencies and being low-cost producers are more important than ever. It is the only way to achieve sustainable profits, even during the current circumstances. Before concluding, I would like to mention that three weeks ago, we published our first integrated report together with our 2021 audited sustainability report. There, we reinforced our commitment to the three ESG pillars over the past 20 years. Since we founded Adecoagro, we created over 6,600 jobs, providing opportunities in regions where there were none. We also contributed towards improving the educational levels of the regions where we operate. When we arrived in Angélica and Ivinhema in Mato Grosso do Sul, their educational levels were well below the national average. Today I’m proud to say that both cities outperform Brazil’s score. We are also working on promoting the development of women in agribusiness by offering training such as how to operate tractors, which will provide them with necessary tools to get jobs in the region. From an environmental point of view, we manage over 520,000 hectares of farmland under a sustainable production model, which fixes huge amounts of carbon in the soil. In terms of energy, over 90% of our total energy consumption is self-generated renewable energy. These are just a few examples of the work we have been doing, which is now being overseen by our ESG Committee to ensure it continues to be integrated into the Company’s overall strategy. To conclude, I want to reiterate my gratitude to all our employees, contractors, and stakeholders for their hard work and commitment. I’m proud of the company we have built together over the past 20 years and excited about the opportunities ahead. Now I will let Charlie go through the numbers of the quarter.

Charlie Boero Hughes, CFO

Thank you, Mariano. Good morning, everyone. Let’s start on page four with a brief analysis of Mato Grosso do Sul. As seen on the top tables, rainfall during the second quarter of 2022 was 103.4% higher than the same period last year and 3% higher than the 10-year average. After a dry start to the year, receiving above-average rainfall during March and April allowed our short implantation to continue to recover from the impact of the frost event in 2021. Better cane availability, in turn, enabled us to increase our crushing pace and continue to take advantage of the constructive price scenario. Let’s move ahead to Slide 5, where I would like to discuss our sugarcane crushing. During the second quarter, our crushing volume amounted to 3.3 million tons of sugarcane, only 5% lower than last year, thanks to our 27.3% increase in harvested area, which allowed us to compensate for lower productivity indicators as we will see next. On a year-to-date basis, crushing volume reached 3.6 million tons, 35.7% lower compared to the same period last year. This was fully explained by the dynamics of the first quarter, namely the late start of crushing activities as expected, and the fact that harvesting activities were mostly concentrated on reform areas with limited growth potential. Nevertheless, we expect to make up for the slow start in the following quarters and reach a crushing volume in line with last year. For instance, we accelerated our crushing pace and in July 2022, we marked a new monthly record of 1.5 million tons crushed in our cluster. Please turn to Page 6, where I would like to walk you through our agricultural productivity. As we expected, sugarcane yields during the quarter were 24.5% lower compared to the same period last year, reaching 60 tons per hectare, while TRS content presented an 11.8% reduction to 119 kilograms per ton. These reductions, which resulted in a 33.4% drop in TRS production per hectare, were fully explained by the lagging impact of the adverse weather conditions in 2021. As most of the harvested area came in below its optimal growth stage, sugarcane yields during the first half of the year reached 59 tons per hectare, while TRS content reached 117 kilograms per ton, marking a year-over-year reduction of 24.6% and 7% respectively. Our strategy of mostly harvesting reform areas enabled us to let areas with greater potential continue to grow, leveraging our capacity to plant new high-yielding cane available for next harvest season and maximize ethanol production while capturing attractive prices. Let’s move ahead to Slide 7, where I would like to discuss our production mix. In the second quarter of 2022, both hydrous and anhydrous ethanol traded at average prices of 23 and 25.02 cents per pound, equivalent to 19.1% and 30.6% premiums to sugar, respectively. Thus, we diverted as much as 79% of our TRS to ethanol to profit from higher relative prices compared to the 59% reported in the previous year. To further take advantage of price premiums, 43% of our total ethanol production was anhydrous ethanol compared to 34% during the second quarter of 2021. This high degree of flexibility constitutes one of our most important competitive advantages, as it allows us to make a more efficient use of our fixed assets and profit from higher relative prices. Year-to-date, we diverted as much as 80% of our TRS to ethanol, a product trading at high premiums. Although the production of both ethanol and sugar was lower as a consequence of the reduction in crushing volume, this was offset by higher average prices. We were able to capture attractive prices, thanks to our high inventories at the start of this year, which were 56% higher than in 2021 for ethanol and 75% for sugar. Please turn to Slide 8, where I would like to discuss our selling volumes and average selling prices by product. As you can see in the left chart, ethanol reported a 16.6% increase in selling volumes to 258,000 cubic meters, mostly driven by anhydrous sales, which increased by 37.5%, while average selling prices were up 45.4% year-over-year to $4.90 per pound. Thanks to our commercial strategy of clearing out our tanks at peak prices and our flexibility to sell both to the domestic and export markets. In the case of sugar, there was a 75.8% decrease in volume, which partially offset the 19.7% increase in average selling prices. The lower volume sold was driven by lower production due to both lower crushing and lower mix, as well as by higher carryover relative to sales. In energy, higher average selling prices were fully offset by a decrease in selling volumes as a consequence of lower crushing and our commercial decision to carry over biogas to benefit from higher expected prices. Regarding carbon credits, let me remind you that due to the efficiency and sustainability in our operations, which rank among the highest in the industry, we have the right to issue carbon credits every time we sell ethanol. Year-to-date, we sold 387,000 CBios, 2.5 times higher than the previous year at an average price of $18.30 per CBio. Following the end of the first semester, we cleared out our stock of CBios at an average price of $29 per CBio, achieving prices as high as $40 per CBio before the drop in prices mid-July. Please jump to Page 9, where I would like to walk you through our sales. Net sales amounted to $164 million in the second quarter of 2022, marking a 10.9% increase compared to the same period last year. Higher revenues are fully explained by a 98.8% increase in ethanol sales during the quarter. Volume sold was mostly concentrated in April when ethanol prices peaked, driven by a delay in the beginning of harvesting activities in Brazil. We took advantage of this scenario and conducted a monthly record sale of 125,000 cubic meters, effectively clearing out tanks at an average price of $26.4 per pound equivalent. During June, we began building inventory to be sold toward year-end at higher expected prices. In addition to profit from higher prices abroad during the quarter, we exported 10,000 cubic meters at a time when domestic prices traded at lower levels. This represents a competitive advantage as we are one of the few players in Brazil certified to export ethanol and who can reach the level of purity required in Europe. Moreover, we sold $5.2 million worth of CBios under the Renova biofuels program. On the other hand, sugar sales were $20.2 million, marking a year-over-year reduction of 71.7%, while energy sales amounted to $9.5 million, 15.6% lower versus the prior year. On a year-to-date basis, net sales amounted to $232 million, marking a 5.6% year-over-year increase. Out of this amount, ethanol sales were $186 million, 71.7% higher compared to the previous year, partially offsetting the 71.1% reduction in sugar sales. CBios sales reached $7.1 million during the first six months of the year, while energy sales were $11.2 million, marking a 24.6% year-over-year reduction. Despite the late start of harvesting activities and thus the lower production, our commercial strategy to carry over stocks from 2021 enabled us to benefit from the constructive price scenario, in particular, to capture the hike in ethanol prices, both domestically and in export markets. Finally, to conclude with the sugar, ethanol, and energy business, please turn to Slide 10 where I would like to discuss the financial performance. Adjusted EBITDA during the second quarter was $104 million, 41.8% higher year-over-year. These solid results were mainly driven by the aforementioned increase in sales, a $10 million year-over-year gain in the mark-to-market of our unharvested cane led by higher expected sales and prices coupled with an increase in Consecana prices, which resulted in a gain in the mark-to-market of our harvested cane. And a $9 million year-over-year gain in the mark-to-market of our commodity hedge position, driven by decreasing prices. Results were partially offset by increasing costs, mostly fertilizers, fuels, and lubricants, in addition to the slight reduction in volume. These same drivers explain the 22.7% year-over-year increase in adjusted EBITDA during the first semester, which amounted to $162 million. In terms of breakdown, during the first half of the year ethanol accounted for 81.5% of total adjusted EBITDA generation in the sugar, ethanol, and energy business, considering other operating income, while sugar accounted for 14.5%. To conclude with this section, I would like to briefly comment on the outlook of our sugar, ethanol, and energy business for the second semester. One year ago, when our sugarcane plantations were hit by frost, we communicated to the market what we believed would be the potential implications for our business. In line with our expectations and as explained above, we entered a harvest period from December 2021 to mid-March 2022 to allow our sugar to continue to recover from the impact of frost. In terms of productivity, yields were impacted during the first semester as expected, but presented a gradual recovery between the first and second quarters. We expect it will return to normal levels towards the second half of the year, as there is no longer sugarcane impacted by the frost. Lastly, we are now accelerating our crushing pace to make up for the slow start of the year. That being said, our operational focus for the year was designed with these events in mind and as our view has so far materialized, our focus for the full year remains unchanged. I would now like to move on to the farming business; please direct your attention to Slide 12. As of the end of July 2022, we have 271,000 hectares or 93% of total area and produced over 1 million tons of aggregate grains. The remaining hectares are expected to be fully harvested in August. Regarding our rice business, this quarter, we included 12,000 hectares related to our recent acquisition of Viterra's rice operations, which had an average yield of 7.3 tons per hectare and marginally increased this campaign's average yield from 6.8 to 6.9 tons per hectare. As anticipated, being geographically diversified enabled us to mitigate weather risk. Let’s move to Page 13, where I would like to walk you through the financial performance of our Farming & Land Transformation Businesses. Adjusted EBITDA in the Farming & Land Transformation Businesses amounted to $20 million for the second quarter, 38.4% below the same period of last year. The decline is fully explained by a lower contribution from our crops and rice businesses to the overall results. Year-to-date, adjusted EBITDA was $56 million, 37.3% lower than the previous year due to the aforementioned lower contribution, which fully offset the improved performance in our dairy business. Higher costs driven by a global inflation environment, coupled with a mixed performance of yields and prices, are the main reasons for the decrease. As known, inflation in the United States amounted to 8.5% for the last 12 months, whereas in Europe it reached 8.9%. This put pressure on margins across industries and geographies. In our crop businesses, adjusted EBITDA amounted to $6 million in the second quarter, marking a 63.4% reduction compared to the same period last year. Results were mainly impacted by higher costs in U.S. dollar terms, mostly seen in agricultural input costs such as fertilizers and diesel, as well as logistics costs. Moreover, we reported a year-over-year loss of $6 million in the mark-to-market of our forward contracts due to higher commodity prices. Nevertheless, results were partially offset by a 66.9% increase in gross sales coupled with a year-over-year gain of $5 million in the mark-to-market of our biological assets on higher harvested area and better prices. Year-to-date, adjusted EBITDA was $24 million, 28.5% lower versus the previous year. It was mostly explained by higher costs in U.S. dollar terms driven by global inflation, mixed performance in terms of yields, with peanuts and second crop corn presenting 4% and 11% reductions respectively, coupled with a $12 million loss in the mark-to-market of our forward contracts. Adjusted EBITDA in our rice business was $5 million during the quarter and $13 million in the first semester, marking a 49.4% and 65.4% year-over-year reduction respectively. Results were mainly impacted by lower yield and the 9% decline in prices at the moment of harvest. Thus, this resulted in a year-over-year loss in the mark-to-market of our biological assets and in the net realizable value of our agricultural produce of the harvest of $30 million in the second quarter and $20 million in the first six months of the year. Regarding yields, the decrease was caused by the impact of weather events in some of our rice farms. We are confident that the acquisition of Viterra's rice operations will contribute to mitigate weather risk and increase our geographic diversification in the region. Moreover, EBITDA generation was also negatively impacted by higher costs in U.S. dollar terms, which pressured margins. Moving on to the dairy business, adjusted EBITDA amounted to $7 million during the second quarter, flat compared to the previous year, whereas during the first half it amounted to $14 million, marking a year-over-year increase of 17.6%. In both cases, results were explained by an increase in both volume and average prices and our continuous focus on achieving efficiencies in our vertically integrated operations. Again, results were partially offset by higher costs in U.S. dollar terms driven by the global inflation environment. In the case of Land Transformation, although no farm sales were conducted, the positive results reflected the mark-to-market of an account receivable corresponding to the latest sale of farms in Brazil, which tracks the evolution of soybean prices. Let’s now turn to Page 15, which shows the evolution of Adecoagro’s consolidated operation and financial performance. On a year-to-date basis, gross sales expanded 27.7% year-over-year to $588 million, whereas adjusted EBITDA amounted to $205 million, marking a 2.7% decline compared to the same period of last year. In terms of production, we expect crushing volume to end in line with last year, as we are accelerating our crushing pace. However, it is worth highlighting that despite lower year-to-date crushing, we are able to capture high prices, thanks to our commercial strategy. To conclude, please turn to Slide 16, to take a look at our net debt position. As of June 30, 2022, net debt amounted to $830 million, a 5.3% increase compared to the previous quarter. This was fully explained by a 9.4% increase in gross debt, partially offset by a 31.8% increase in our cash position. As a reminder, cash generation is concentrated in the second semester of the year, whereas the first semester has the highest working capital requirements, as our crops are planted and harvested. Thus, we expect to reduce our indebtedness as we finish with harvesting activities and start collecting sales throughout the next quarter. On a year-over-year basis, net debt increased by 11.5%. This was mainly driven by the impact of adverse weather conditions in Brazil resulting in a year-over-year reduction of 3.5 million tons in our crushing volume and negatively impacting our last 12-month results, coupled with higher working capital requirements, mostly on account of higher input costs. We believe that our balance sheet is in a healthy position, not only based on the overall debt levels, but also on the term of our indebtedness, most of which is long term. Our net debt ratio was 1.9 times in this quarter, versus the previous quarter. At the same time, our liquidity ratio reached 1.3 times. This clearly shows the full capacity of the company to repay short-term debt with cash balance and operating external capital. Thank you very much for your time. We are now open to questions.

Operator, Operator

Thank you. Our first question is from Isabella Simona with Bank of America. Please go ahead.

Guilherme Palhares, Analyst

Good morning, everyone. Guilherme from Bank of America. Two questions from our side in terms of the sugar and ethanol business. First, congratulations on the commercial execution in this first half. But looking for if you could just share your thoughts in terms of the mix that you expect to crush in terms of ethanol and sugar and just in terms of the commercial strategy, when you look in terms of hedges for this season and the next one, what is your strategy there? We saw marginal improvement in terms of the volumes hedged for sugar, and if you could share your thoughts going forward, please. Thank you.

Mariano Bosch, CEO

Hi, Guilherme. Thank you very much for your question. We also have in the website another question from Eduardo Monez related to the same point, and the question is related to the tax reduction in Brazil. What are the impacts on your strategy for the rest of 2022, and is hydrous production preferable? Are hydrous prices sustainable? How do you see the trend for ethanol exports and better sugarcane production for the second half? And can we expect strong EBITDA growth with margin expansion on the year-on-year? So I think your question plus this question on the website will be answered by Renato, who can give more clarity on this. Renato.

Renato Junqueira-Santos Pereira, Executive

Okay. Thank you for the question. So we start with sugar, which will remain very positive with the sugar outlook. We think that the drop in price a couple of weeks ago was a technical movement, nothing related to the fundamentals of sugar. Actually, we are positive about the sugar market scenario. If you take the supply side of the equation, we think that the centers of TRS production are going to be in line with last year, with a little bit more crushing and a little bit less TRS per ton. We believe the mix is going to shift slightly towards sugar, approximately 1%, which represents approximately one million tons of sugar. It is not a big change because the news were already maximizing sugar before the tax change, and also because in the third quarter it is more difficult to have flexibility due to the high TRS content. The sugarcane is rich, and mill owners are trying to crush as much as possible. Also, the European crop is facing some issues, leading to a lower crop from Europe. So we expect many factors on the supply side to influence prices. Regarding demand, the lower price increases demand for sugar from various destinations. We think that a good indication of sugar demand is a strong cash premium and a healthy line. Just a point regarding Adecoagro: Since we have not hedged our total position, we have hedged 63% of our 2022 production at $19.58 per pound. We are also able to capture the spot market premium, approximately 2% on the cash premium I just mentioned. The market is predicting a gap in sugar demand in Q3 and Q4, which may be more positive for price. Lastly, I would note that the current price of sugar is below the Indian price levels, and the market needs Indian sugar. So we believe sugar prices must increase close to $19, or even a bit higher, to attract Indian sugar. So, at those levels, we might increase our hedging position. Regarding the ethanol outlook strategy, we are also positive, independent of the tax change, which clearly puts some pressure on hydrous ethanol. We remain optimistic about the supply and demand scenario. The TRS levels in the centers of Brazil will be similar to last year. The fact that mill owners are maximizing sugar will increase pressure on the hydrous market. Exports have been increasing significantly, over 80% higher than the same period last year. We can see that competitive demand is also recovering, and the current blending rate at pumps is close to 7%, which incentivizes consumption. Our strategy is to carry out our hydrous production efficiently. We have the flexibility in our tanks because, as mentioned, we sold our production in April at very high prices, exceeding $0.26 per pound. Currently, we can produce nearly 7% of our total ethanol production as anhydrous and have the capacity to dehydrate hydrous ethanol for export. We are delivering our hydrous contracts today at a price of $0.21 per pound. We are also taking advantage of the international market to export, having already exported 8,000 cubic meters, and we think we can export an additional 20,000 cubic meters, reaching a total of 100,000 cubic meters. This export has a premium of 15% over hydrous in the domestic market. Additionally, it’s important to highlight that not all producers can do these exports; they need to have the necessary certifications. As Mariano mentioned at the beginning of the call, we have the necessary certifications and technology to produce ethanol suitable for the European market at the required purity level. So, depending on the scenario, we may dehydrate more, but that is the current perspective for now. Regarding the sugarcane, I think Mariano was asking about the second part of the question. As we have been discussing, in the first semester, we had lower yields due to the frost from last year, and also because our strategy was to prioritize harvesting early in the year, which filled lower potential growth areas. So, basically, we only crushed replanting areas. Now that we are moving into the second semester, we see that yields are recovering rapidly. The sugarcane fields are looking very good. In July, we had 1.6 million tons of crushed sugarcane in our Mato Grosso do Sul cluster, marking a monthly record. It is also important to mention that early this week, we received 55 millimeters of rain in our cluster in Mato Grosso do Sul, which was fantastic for the sugarcane outlook, supporting the improvement towards the end of the year and into next year. As the season progresses, we expect to catch up the crushing gap, finishing the year with crushing volumes similar to last year. By doing this, our costs will be diluted. We expect that the total costs this year will be 10% to 15% higher than last year, around inflation levels. So I think that covers your questions, right, Mariano?

Mariano Bosch, CEO

Thank you, Renato.

Operator, Operator

Thank you. The next question is from Lucas Federa with JPMorgan. Please go ahead.

Lucas Federa, Analyst

Okay. Thank you. So I have two questions. The first one is also for Renato about the quality of the sugarcane and the damage caused by last year's events. So my question is, Renato, if we have a normal rainy season during the summer, how will the quality of your sugarcane be next year for the coming season, and how quickly can crushing recover if you have no weather issues during the summer? The second question is for Mariano and Charlie. Could you comment on the outlook for the following season in the farming and rice businesses, regarding your expectations on weather and costs? If you could comment on how especially the fertilizer line impacted you this season and, considering your purchases, how should we think about this fertilizer line going forward? Thank you.

Mariano Bosch, CEO

Thank you, Lucas, for your question. Renato, do you want to comment on this?

Renato Junqueira-Santos Pereira, Executive

Hi Lucas, as I was mentioning, the sugarcane is looking very good. All the sugarcane that we are harvesting now is regrowing. This crop that we call is looking very good. Because we didn’t have much rain during key periods, we didn’t have damage during harvesting operations. So we are very optimistic about the sugarcane for next year. We didn’t have any frost this year. So effectively, we have eliminated the frost damage that impacted our business last year. Therefore, we are very optimistic about next year. We expect to increase our crushing by at least 10% compared to this year. Next year will be a transition year because we are recovering from several adverse weather events. So it will be a year of recovery, and we will likely reach our full crushing capacity in the following months.

Mariano Bosch, CEO

Very clear, Renato. Thank you. Lucas, regarding the outlook for the following season, we are very well positioned today in rice and crops for next season. We are starting the planting season, and the amount of water we have already in the reservoirs for rice operations is very good and sufficient for a successful season. Regarding the crops, all the fields are ready to start the plantation. We have all the necessary inputs purchased, which is why you see higher input costs and more working capital for this season in order to be well prepared for the planting phase that will be reflected in 2023 numbers. To provide a little more insight, the campaigns are reflected in the following year. The campaign of 2021 shows the numbers from 2021, and for rice and crops, it was an excellent year due to very low costs at planting time and the price increases in 2021. That was an exceptional year in our crop-related history. Looking at the subsequent year, which is the current year, we are experiencing mixed results. We see a small increase in prices, about 10% to 15%, but also a nearly 40% increase in costs, primarily related to freight, fertilizers, and chemicals. This increase in costs is reflected in our current campaign, which we just finished in 2022. For next year, 2023, which we are starting to plant now, we are much more optimistic because the price increases already occurred. We remain bullish on commodity prices that will be harvested.

Lucas Federa, Analyst

Just one quick clarification. So the fertilizers you are going to be using in the 2023 crop season are the same as the ones you are starting to prepare now. How much does that increase over 2022, just so we have an idea?

Mariano Bosch, CEO

The main impact is 2022. The increase we are reflecting today is a 40% spike. Now from that 40% to today is almost flat.

Operator, Operator

The next question is from Henrique Brustolin with BTG. Please go ahead.

Henrique Brustolin, Analyst

Hi, good morning everybody. One question on my side is on the sugar and ethanol business as well. I just wanted to hear from you when we look forward. How do you see the current environment to continue expanding the sugarcane fields you have in your current cluster? When you think about your installed capacity to fill that up, how much do you believe improved yields should help that, and how much should come from bigger area expansion? So that is my question on the sugar and ethanol side.

Mariano Bosch, CEO

Okay. Thank you very much. For your question, Renato, do you want to comment, and then I can complement?

Renato Junqueira-Santos Pereira, Executive

Yes. Thank you for the question. Our current area of sugarcane is nearly enough to supply our industrial capacity. Our industrial capacity in the cluster in Mato Grosso do Sul is around 12.5 million tons, and we have almost enough sugarcane to supply all the cane that we need. But of course, we depend on the yields we are discussing. So if you have a yield between 85 and 90 tons per hectare, we are fine, but we are still planting new areas. We believe we can always enhance our crush volume in the industrial sector. We have a lot of strategically important farms close to our mills, which allows us to decrease average distances of our sugarcane fields. Looking ahead, as I said before, we expect next year to be a transition year; we should be crushing in Mato Grosso do Sul close to 11 million tons of sugarcane, which is about 1 million tons more than this year, and probably reach somewhere between 12 and 12.5 million in the following year.

Mariano Bosch, CEO

Yes, the 20.5 is only in Mato Grosso do Sul. The total output is expected to reach 13.7 million tons, as we have consistently mentioned. Additionally, I would like to add that you have seen the sugarcane area reducing all over Brazil, particularly in Mato Grosso do Sul. Due to the competitive advantage of sugarcane over soy and corn, we have been increasing our sugarcane area relative to these crops, which reinforces our optimistic outlook to fill our crushing capacity. Additionally, as Renato mentioned, there is room for growth when we consider the long-term organic development of this area that can continue to improve.

Operator, Operator

This concludes the question and answer session. At this time, I would like to turn the floor back to Mr. Bosch for any closing remarks.

Mariano Bosch, CEO

Thank you everyone for participating in the call. We hope to see you in our next events.

Operator, Operator

Thank you. This concludes today’s presentation. You may disconnect your line at this time and have a nice day.