Earnings Call
Adecoagro S.A. (AGRO)
Earnings Call Transcript - AGRO Q3 2021
Operator, Operator
Good morning ladies and gentlemen and thank you for waiting. At this time, we would like to welcome everyone to Adecoagro’s Third Quarter 2021 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. 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 conference 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 2021 third quarter results conference. 2021 marked a 10-year anniversary of Adecoagro's IPO. In the last 10 years, our adjusted EBITDA grew from $100 million to roughly $400 million. Our cash generation became structurally positive. Since the IPO, we expanded our businesses and conducted investments that allow us to vertically integrate our operations, improve efficiencies and enhance our competitive advantages. We have also become a source of carbon credit and a reference in the sustainable production of food and renewable energy. Adecoagro is now a more matured company with a healthy capital structure and the capacity to commit to a systemic distribution policy. As we mentioned in the past, during 2021, we are distributing cash to our shareholders via our share repurchase program. So far, we have already repurchased over 6 million shares equivalent to more than 5% of the equity of the company. Starting in 2022, we will distribute annually at least 40% of the adjusted free cash from operations generated during the previous year distribution will consist of a dividend of at least $30 million per year, which will be paid in May and November. At the same time, we will continue to repurchase shares under our products, as we see appropriate until reaching the distribution target. On top of our distribution policy, we continue to see attractive growth opportunities that synergize well with our current operations, have potential to make them more efficient and sustainable and offer very attractive returns. And all these will never compromise our solid profit. Now, in relation to the performance of our businesses, consolidated adjusted EBITDA marked a new record high for the first 9 months of the year, and an increase of over 50% compared to last year. In our sugar, ethanol and energy business, crushing volumes during the quarter was only 200,000 tons lower than last year, despite the impact of the frost. This was possible because we accelerated harvesting activities, increased harvested area and were able to purchase some cane from third parties. As we were expecting lower production was more than offset by the higher prices that we captured in sugar, ethanol and electricity. We continue to see contracted price scenario in the following quarters due to the impact in supply and to the early finish of the harvest season for most of the mills. We are in a great position to continue to benefit from this price scenario as we have been hitting the low end of our commercial policy. We have invested in our on-site storage capacity, which enables us to carry over 155,000 cubic meters of ethanol and 165,000 tons of sugar. We have recently increased our capacity to produce anhydrous ethanol, which traded at $0.24 per pound in October, marking a 10-year high. We have the necessary flexibility to switch from producing sugar to ethanol. In fact, we are currently producing 100% ethanol to benefit from higher relative prices. We continue to actively participate in the RenovaBio program through the sale of more than $2 million of savings during the quarter. As part of our efforts to continue increasing the sustainability of our operations and improve our RenovaBio score, we will soon start testing the use of biomethane in 13 vehicles. We are very excited about the development of this technology and see a great potential for it. Moving on to our rice business, we achieved strong results during the first 9 months of the year, including a record high yield of 7.8 tons per hectare on average. This was possible, thanks to the investment we made across the business, but especially to the innovative approach of our team who brought a special focus on productivity, grain quality and efficiency through the value chain. As we improve our approach and ethics, and offer customized products that perform well at the farm and the industry level, we continue to develop new markets and increase our mix of higher value-added products. We are proud of the work we are doing in this segment of our team and of our use of technology to develop a sustainable production system that is generating great results. Going to the crop business, we completed harvesting activities for 2020, '21 harvest year, totaling 700,000 tons of grains. We achieved good yields, although it was a challenging year. This was thanks to our geographic product diversification, which is one of our competitive advantages and allows us to extend the planting and harvesting window and thanks to that work of our team and the use of technology. Productivity indicators were more than compensated by the high average prices. At the present time, all of our teams are fully focused on the planting activities for the 2021, '22 harvest year. So far, we are planting crops and rice at an excellent base under good soil and weather conditions. Now we are entering into the period where most of the physical yields are defined. In our daily operations, we continue to achieve high productivity indicators and transform raw milk into value-added products, demanded both in the domestic and export markets. As every year, Cushman & Wakefield conducted an independent appraisal of our land portfolio and valued it 2.4% above last year. To conclude, I would like to express my gratitude to our shareholders for their continued support. I also want to thank our operation and management teams for the hard work and the effort they did throughout all these years. I am convinced that we have the right team and that we are following the right strategy to continue to generate attractive and sustainable margins for all of our shareholders. Now, I will let Charlie walk you through the numbers of the quarter.
Charlie Boero Hughes, CFO
Thank you, Mariano. Good morning, everyone. Let's start on Page 4 with a brief analysis on the rains in Mato Grosso do Sul. As seen on the top charts range in our third quarter of 2021, we are lower than during the same period last year and the 10-year average. However, increased precipitation during April was very favorable for the recovery of sugarcane yields. Before turning to the following slide, I would like to briefly comment on the cold front that hit most of Brazil's key productive area at the beginning of the quarter. As you know, low temperatures at the end of June and July caused severe frost damage on sugarcane plantations in regions including São Paulo and Paraná states, as well as Mato Grosso do Sul and Minas Gerais. This caused a negative impact on yields, which were already affected by the dry weather observed through all the year in the center-south region of Brazil. In light of this, market estimates of Brazil's shrinking supply were cut by as much as 15% by some analysts. While expectations at the beginning of the year pointed at a crushing volume of 590 million tons of sugarcane, current expectations range between 520 million and 510 million tons. The pressure on the supply side translated into higher prices for all three products. This made the price scenario even more constructive than it already was. As we'll see in the following slides, we were in an excellent position to capture this upside because of our strategy to hedge at the low end of our commercial policy. In fact, for the 2022 and '23 campaign, we still have over 90% of TRS unhedged. Please jump to Page 5, where I would like to walk you through our agriculture productivity. During the third quarter of 2021, sugarcane yields marked a 27.2% reduction compared to the same period of last year, reaching 59 tons per hectare. TRS content, in turn, presented a 6.9% reduction and totaled 132 kilograms per ton. The lower-than-expected agricultural productivity indicators were fully explained by the adverse weather conditions, as most of the harvested area was below optimal growth stage. It is worth mentioning that accelerating harvesting pace is very important to avoid the frost from causing additional damage on the cane. The combined effect on yields and TRS content resulted in a TRS production per hectare of 7.8 tons during the quarter, resulting in a 32.2% reduction year-over-year. On a 9-month basis, the year-over-year reduction of 11.7% in sugarcane yields and 12.5% in TRS per hectare, is fully explained by the third quarter dynamics. Going forward, it is expected that productivity will return to normal levels as sugarcane continues to recover favored by increased precipitation during October. Now let's continue with Slide 6, where we'd like to discuss our sugarcane crushing strategy. Because we have in place an integrated business, our crushing volume during the third quarter of 2021 was only 200,000 tons lower year-over-year, despite lower-than-expected agricultural productivity indicators. This achievement was possible because we harvested 28.2% more area than during the same period of last year, and increased the amount of cane purchased from third parties by 15.5%. In addition to this, our team responded quickly and leased third-party harvesters in order to accelerate harvesting activities to minimize the weather impact. By doing so, we achieved a crushing volume of 4.1 million tons during the quarter, only 5.2% lower year-over-year. As of September the 30, crushing volume reached 9.7 million tons, or 13% higher year-over-year. This increase was explained by the good cane availability, an early start of crushing activities during the first quarter of the year as opposed to last year, and by the favorable weather during the second quarter of 2021. Let's move ahead to Slide 7, where I would like to discuss our production mix. As you can see in the top left chart during the third quarter of 2021, hydrous and anhydrous ethanol Mato Grosso do Sul traded at an average price of 19.2 and 21.2 cents per pound sugar equivalent, representing a 2.8% and 13.2% premium to sugar respectively. It is worth pointing out that the evolution of sugar prices during the quarter was also very positive. In line with our strategy to maximize production of the product with the highest marginal contribution, during the quarter we diverted 55% of TRS to ethanol to profit from higher relative prices. To further take advantage of price premiums, 63% of total ethanol production was anhydrous ethanol compared to 41% during the third quarter of 2020. This increase in anhydrous ethanol production was possible thanks to the recent incorporation of our molecular sieve in Ivinhema which increased our dehydration capacity by 50%. Total production of both ethanol and sugar was 11.2% and 7.3% lower compared to the third quarter of 2020, respectively. As previously mentioned, this was explained by the lower production of TRS, but it was more than offset by an increase in prices. As Brazil is one of the world's main producers and exporters of sugar, any weather event that might impact supply will result in an increase in prices. Our low hedging volumes enabled us to capture the benefit that this natural hedge offered. On a year-to-date basis, production mix was in line with the first 9 months of 2020, standing at 58% ethanol and 42% sugar. Volumes produced were 14.4% and 13.6% higher, respectively, favored by strong production in the first 6 months of the year. In 2021, we maximized sugar production in the first quarter to benefit from higher relative prices and switched to ethanol during the second and third quarter. The opposite was observed in 2020 when we maximized ethanol during the first quarter, then switched to sugar as ethanol prices plummeted in light of the pandemic, and went back to maximizing ethanol in the third quarter. This high degree of flexibility constitutes one of our most important competitive advantages, since it allows us to make a more efficient use of our fixed assets and profit from higher relative prices. Year-to-date, ethanol accounted for 61.7% of total adjusted EBITDA generation in sugar ethanol and energy business considering other operating income, while sugar accounted for 30.2%. Please turn to Slide 8, where I would like to comment on our energy production strategy. As you know, Brazil's energy matrix is heavily reliant on hydroelectric energy. Due to the prolonged period of dry weather in the center-south region of Brazil, the level of water in the reservoirs was low. This resulted in a hike in spot prices, which increased from BRL 92 per megawatt hour last year to BRL 582 per megawatt in the third quarter of 2021. To profit from this situation, we increased our energy production by burning bagasse, both owned as well as purchased from third parties, wood chips purchased from third parties and sugarcane straw collected from the field. Exported energy during the quarter totaled 263,000 megawatt hour, 4% higher compared to the same period of 2020, while our Cogen efficiency ratio was 9.6% higher. Let's please turn to Slide 9, where I would like to discuss quarterly sales. Net ethanol sales during the third quarter of 2021 amounted to 83.4 million, 121.7% higher year-over-year. This was mostly explained by an increase in average selling prices measured both in real as well as U.S dollars, resulting in a 70.8% increase mostly led by anhydrous ethanol. Despite a lower production of ethanol during the quarter and an aggressive carryover strategy to benefit from higher expected prices, ethanol sales volume presented a 15% increase compared to the third quarter of 2020. This was fully explained by the lockdown measures adopted in 2020 in response to the COVID-19, which negatively affected demand for fuels resulting in a decrease in sales and our stock buildup. On a year-to-date basis, ethanol sales were 69.6% higher than during the first 9 months of 2020. This was explained by a 49.3% increase in average selling prices and a 13.6% increase in selling volumes. A brief comment on CBios. During the quarter, we sold 255,800 CBios under the RenovaBio program at an average price of BRL 46 per CBio, approximately $8.7 per CBio. Year-to-date, we sold 367,900 CBios at BRL 41.6 per CBio, approximately $7.8 per CBio. In the case of energy, selling volumes during the quarter reached 319,000 megawatt hour, marking a 2.6% year-over-year increase; average selling prices were higher both measured in real as well in U.S dollars, standing at $58.9 per megawatt hour, implying a 64% increase compared to the same period of last year. This was driven by the low levels of water reservoirs, which reduced the supply of hydroelectric energy. All in all, net sales of energy in the third quarter of 2021 were 18.8 million, 68.3% higher year-over-year. On a 9-month basis, net sales of energy were 37.7% higher year-over-year as a consequence of the increase in selling volume and average selling prices. Net sales of sugar during the third quarter of 2021 reached 46.6 million, 27.2% lower year-over-year. This decrease was driven by a 50.7% decrease in selling volumes, partially offset by a 52.1% increase in average prices, which reached $0.172 per pound. There are two points worth highlighting. During the third quarter of 2020, we increased the volume of sugar sold as the market for ethanol was fairly illiquid, and prices were low due to the pandemic and due to our commercial strategy to carry over stocks in order to profit from high expected prices. Stocks of sugar in the current quarter almost doubled compared to last year. On a 9-month basis, sugar sales reached 143.3 million led by a 48.7% increase in average selling prices which fully offset the 2.4% decrease in selling volume. Finally, to conclude with the sugar ethanol and energy business, adjusted EBITDA during the third quarter of 2021 was 138.1 million, 51.7 million or 59.8% higher compared to the same period of last year. The main driver behind EBITDA growth was the 36 million increase in net sales coupled with a 20 million year-over-year gain in the mark-to-market of our harvested cane, led by an increase in Consecana prices of 67%. The increase in adjusted EBITDA was partially offset by a 25.2 million increase in cost, mainly explained by the increase in harvested area to make up for the lower productivity of the cane, which resulted in higher salaries, higher use of diesel and higher maintenance costs among others as well as by the higher purchase volume of third-party cane, bagasse and wood chip among others. Year-to-date, adjusted EBITDA stood at 269.8 million, 56.2% or 97.1 million higher than during the same period of last year. Higher results were explained by a 60% increase in net sales coupled with a 39.7 million gain derived from the mark-to-market of our sugar cane, mostly related to harvested cane. This was partially offset by an increase in cost combined with a 23.7 million loss in our commodity hedge position and an 8.8 million increase in selling expenses in line with the increase in sales. End of period stocks amounted to over $135.1 million, marking a year-over-year increase of 2.3 times, led by our commercial strategy to carry stocks in order to benefit from higher expected prices. I would now like to move on to the Farming business. Please direct your attention to Slide 12. As of the end of October 2021, we harvested over 260,000 hectares successfully completing the 2020 and '21 harvest season. This amounts to over 1 million tons of agricultural products harvested and transported across 10 provinces in Argentina and in Uruguay. We are currently engaged in planting activities for the 2021 and '22 harvest season, so far observing normal weather conditions. We expect to plant 282,880 hectares, 7.9% higher than the previous harvest season. Let's move to Page 13, where I would like to walk you through the financial performance of our Farming and Land Transformation Businesses. Adjusted EBITDA in the Farming and Land Transformation businesses reached $24.8 million in the third quarter of 2021 and $113.4 million in the first 9 months of the year. This marked a year-over-year increase of 19.9% and 32.6%, respectively. Solely focusing on the Farming business, results stood at $23.9 million during the quarter and $107 million on a 9-month basis, marking a year-over-year increase of 30.6% and 55.7%, respectively. Adjusted EBITDA in our Crops segment was $13.7 million during the quarter, $7.9 million higher compared to the same period of last year. This was explained by an increase in average selling prices of $127 per ton increase in the case of soybean and $71 per ton in the case of corn, coupled with a year-over-year gain in the mark-to-market of our biological asset on the account of an increase in hectares, yield and prices. This was partially offset by an increase in costs driven by inflation in U.S dollars terms. Year-to-date, adjusted EBITDA amounted to $47.9 million, 89.5% higher compared to the same period last year. The improved performance was also mostly explained by a year-over-year gain in the mark-to-market of our biological asset on account of an increasing prices. End of period stocks were 2.3 times higher than last year, amounting to over $15 million mainly as a consequence of a commercial strategy to carry stocks in order to benefit from higher prices. In the case of rice, most of the margin was already captured during the first quarter of the year. In this line, adjusted EBITDA reached $2.8 million during the third quarter, marking a year-over-year loss of 54.3%. However, during the 9-month period adjusted EBITDA stood at $40.7 million, 37.9% higher year-over-year. The positive financial performance was mostly explained by an increase in yields, which reached a record high of 7.8 tons per hectare and increasing area and an increase in prices which led to a year-over-year gain in the value of our biological asset and agricultural produce. These results were possible due to our continuous focus on productivity, enhanced efficiencies and the consolidation of our team. The Dairy business generated an adjusted EBITDA of $7.2 million during the third quarter of 2021 and $19.3 million during the first 9 months, an increase of 13.5% and 32.6% compared to the same period of last year, respectively. In both cases, higher results were explained by an increase in gross sales and achieved efficiencies in our vertically integrated operations, including high productivity at the farm level, and the flexibility of our industrial assets. In the case of Land Transformation, a minor gain was registered in the current year compared to a $16.3 million result in 2020, which reflects the sale of some assets of our farm. Let's now turn to Page 15, which shows the evolution of Adecoagro's consolidated operational and financial performance. On a year-to-date basis, gross sales reached $777 million and adjusted EBITDA $368 million, marking a year-over-year increase of 33.9% and 50.4%, respectively. During the quarter, gross sales reached $317 million, while adjusted EBITDA totaled $157 million marking a 33.2% and 53.7% increase compared to the same period of last year. From an operational point of view, we continue increasing our planted area both in our Farming and sugar, ethanol and energy business. This in line with our enhanced efficiencies on the farm and industry level has led to an 8.2% increase in our production of crops and rice, and a 13% increase in crushed volume as previously mentioned. To conclude, please turn to Slide 16 to take a look at our net debt position. Our net debt as of September 30, 2021 reached $725 million, $19.4 million or 2.6% lower than the previous quarter. This was explained by the combined effect of a 1.6% reduction in gross debt and a 2.5% increase in our cash position, even though marketable inventories in the third quarter of 2021 were $66 million higher compared to the previous quarter. The increase in cash position was a consequence of greater collections, lower working capital requirements since in the second semester of the year, planting and harvesting costs have already been incurred, and we start selling and collecting income from most of our products. On a year-over-year basis, net debt increased by 1.9% compared to the same period of last year. The 1.1% reduction in gross debt was fully offset by an 11.2% decrease in our cash position. This reduction in our cash position was mostly explained by an increase in marketable inventories of $124 million compared to the same period of last year. We believe that our balance sheet is in a healthy position not only based on the adequate over the debt levels, but also on the term of our indebtedness, most of which is long-term debt. As of September 30, 2021, our net debt ratio reached 1.56x. As can be seen, we continue the downward trend compared to both the previous quarter of 2021 and the same period of last year, marking a reduction of 14.1% and 31.9%, respectively. At the same time, our liquidity ratio which is calculated as cash and equivalents plus marketable inventories divided by short-term debt reached 2x, 8.9% above last quarter's ratio of 1.84x and 33.8% higher than the same period of last year, which reached 1.49x. This clearly shows the full capacity of the company to repay short-term debt with cash balance without raising stronger capital.
Operator, Operator
Today's first question comes from Guilherme Palhares with Bank of America. Please go ahead.
Guilherme Palhares, Analyst
Good morning, everyone. Thank you for taking my question. I have two actually. The first one being on the sugar and ethanol business. Looking at the huge potential you guys had this year and looking for the next crop season, what can we expect in terms of recovery of TRS of cane? And the second one is related to the fertilizers and the market price that we are seeing. And if you could explain a bit about what it will be paying that for your organization? And what is the exposure that you have in the Farming business? Should these prices be very important for us. If you could give more details on that front. Thank you.
Mariano Bosch, CEO
Hi, Guilherme, good morning. Thank you very much for your question. I want to take the second part of the question, and then I'm going to ask Renato to delve more into the details on the sugar and ethanol business and what we can expect for the future. Regarding our fertilizer position for this year, we are pretty well covered. We anticipated our buying soft fertilizers. So we are in a very good position in the medium or short term. And for the longer term, of course, there has been an increase overall in general. And we will need to take into account that will have an impact on the total cost that applies to 15% of the total costs. This 15% includes fertilizer and agricultural inputs that both are increasing in terms of dollar prices. So for next year that is not the season, so the season that we are planting is already covered. Therefore, for the following season we will need to adjust the leasing costs etc. to try to compensate for this increase in the fertilizer costs. That is one part of the equation and the other part is that this also gives us an opportunity to be even more efficient in the transformation of the vinasse and the transformation of the byproducts into organic fertilizer. This transformation of organic fertilizer has been very profitable and we are increasing and we have our growth opportunity there to continue to increase the value of our devices. The sustainability and the increase in the generation of carbon credits through the transformation of this manure into biological fertilizer are also allowing us to capture more benefits. So we see all these as an opportunity also. Regarding the first part of your question about sugar and ethanol yields and what we can expect there. I would like Renato to address more of those details. Renato? I think we don't have Renato in the line. So I'm going to go through it. The sugarcane yields, of course, have been affected by the frost as we have explained in our previous calls. This frost affected the yields this quarter. From now on yields are starting to improve because we are now going to be harvesting or today we are harvesting cane that has been less affected by these frost. And for next year, that was your question, we can expect yields to be lower than the average in the first half of the year. However, in the second half of the year, we can expect even better yields because after receiving excellent rains in October, the sugarcane plantation is now looking pretty well. Therefore, for the second semester, we can expect even higher than average, as we can see developing today. So for next year, we can expect lower yields in the first half and higher yields in the second half. That's basically a quick summary.
Guilherme Palhares, Analyst
Now that's very clear. Just one additional question, if I may, in terms of the dividend policy that the company disclosed this quarter, which is a milestone for the company that I understand. If you could just walk us through the rationale of choosing this 40% threshold and the metric looking at the free cash flow. And what we could expect the impact of that policy in terms of the investments ahead that the company would like to perform going forward.
Mariano Bosch, CEO
Sorry, Guilherme, I'm not sure I understood exactly the question, but with this policy, as we explained, we are committing that 40% of the free cash flow generated from operation is what is going to be distributed to the shareholders. The rest continues to be for these growth projects that we are seeing as very attractive in the different businesses that we currently have.
Operator, Operator
And our next question today comes from Thiago Duarte with BTG. Please go ahead.
Thiago Duarte, Analyst
Thank you. Good morning, everybody. Morning, Mariano, Charlie. Yes, I have two questions on the sugar, ethanol and energy business. The first one is similar to the previous one, but still focus on this ongoing crop. I think last quarter after the frost and knowing the impacts of the drought, you mentioned that you were expecting to crush for the full year around the same volumes that you crushed last year. I just wanted to check whether this assumption is still valid after the third quarter or not and what would be a reasonable cane volume for the year as per your expectations. The second question is a more specific one regarding you mentioned very briefly in the earnings release the biomethane project and the investments that are happening. Can you hear me?
Mariano Bosch, CEO
Yes, perfectly well.
Thiago Duarte, Analyst
Okay. Sorry. Regarding the investments you're making for that project, you mentioned in the release that you aim to fully replace the diesel currently procured from the market. Could you provide more details on the size of the capital expenditures and the production capacity for biomethane that you anticipate having in the future? Any information on these aspects would be greatly appreciated. Thank you.
Mariano Bosch, CEO
Good morning, Thiago. Thank you for your question. I'm glad to discuss this. Regarding your second question about the biomethane project, we are very enthusiastic about it and the technology we've been developing for the past 7 or 8 years. We see continuous progress in this project each year. We now have a biodigester that processes vinasse to generate electricity from the biomethane. Currently, we are investing in transforming that biomethane to use in vehicles. We have already begun using it in some vehicles as our first step. We expect that by 2022, we will be utilizing biomethane in 13 vehicles, though this is still in the testing phase. We are very optimistic and are evaluating the potential of all the vinasse we have, which could theoretically replace nearly all of our diesel needs based on the capabilities of these technologies. Additionally, we have a partnership in place to develop this further, which includes the possibility of selling the technology to third parties. We see significant potential in this area, but we acknowledge that it is still an evolving technology that we are eager to explore.
Thiago Duarte, Analyst
That's clear. But do you have any information on the project regarding CapEx, so we can understand the level of investment you expect to make there? That would be helpful; I understand the rest.
Mariano Bosch, CEO
Yes, we still don't know the amount of the CapEx, that's why we are talking about the possibilities. The CapEx we will have to plan in a very short period of time, as we've been seeing now all these CapEx is within our existing businesses have very attractive returns, very short period of payback. So that would be the analysis once we have or we are pretty sure about the technology. It will be clearly communicated if it's not the situation. Then going to the other part of your question, Thiago, regarding the total crushing of this year. In our last quarter, we mentioned that it would be some way below last year because of the impact of the frost. Now that we were able to accelerate the harvest and the quarter was excellent in terms of all the actions that we're taking to accelerate the harvest and to manage all these frosted cane that performed even better than what we were projecting because we were able to hire some additional harvesters. We can see that, we are going to be pretty near what we harvested last year, probably 1% or 2% below last year. We are currently harvesting. We will end up harvest by December. We are now harvesting with 100% ethanol. The difference between ethanol and sugar prices weigh in favor of ethanol. I know Charlie was explaining in the beginning, within ethanol, the hydrous ethanol is performing very well. So today we are producing 100% of ethanol in our current harvest.
Thiago Duarte, Analyst
That's clear. Thank you, Mariano.
Mariano Bosch, CEO
Thank you, Thiago, for your question.
Operator, Operator
And our next question today comes from Christian Audi with Santander. Please go ahead.
Christian Audi, Analyst
Thank you. Hi, Mariano and Charlie. First of all, congratulations on the great results. I would like to ask a question first on capital allocation, Mariano. Can you as we go through the different elements on the leverage front, as you showed very clearly in your presentation, you're very low net debt to EBITDA. What is the target that you plan to maintain that you're comfortable with going into next year? On the second, use of cash in terms of CapEx? Or can you just detail a bit more your expectations for CapEx for major projects next year? You already touched on this test element of biogas? Are you looking at any other products such as increased areas or anything else that could result in higher CapEx than expected? And then in terms of dividends versus share buybacks, congratulations on establishing a dividend policy? That's something that I think the market was looking for. And I know you were working very hard on it. So congratulations on getting it done. How do you think about the dividend versus share buyback decision? Is that purely a tax issue where you will pay the dividends? And then what's leftover you use for share buybacks? And then the second set of questions was more related to pricing. You already touched on your expectation for continually good ethanol and sugar pricing. Can you just elaborate a bit on that, particularly as it relates to sugar and how you're seeing the global deficit or surplus for the next year?
Mariano Bosch, CEO
Hi, Christian. Thank you for your question. Regarding the first part of your question, similar to what I was explaining when we started the call, we feel that today we are in a very good position to implement this distribution policy. Our policy refers to at least 40% of the adjusted free cash flow from operations that has been generated in the previous year. Here I would like to point out that this year 2021, where we acquired 6 million shares, that is over $50 million. If we take a look at the net cash from operations generated in 2020, that was around $100 million. So in this particular year 2021 because of the projects that we performed and because of our solid debt position, and because we are below 2x EBITDA, we feel very comfortable in that area. That's always been below the 2x EBITDA during the whole year, and because we were able to use more than 50% of the net cash from operations for dividends, assuming the previous year. That's why within our distribution policy, we are assuming and understanding our capital allocation thinking. The same way that we've been explaining in the last several calls is understanding this asset capital allocation system. Going back to at least $30 million of dividends and the rest to complement through buybacks. We consider many factors including features that can affect some of our investors. But this can, of course, vary from time to time. Finally, regarding the CapEx and the opportunities we see within these growth projects, most of the investments we are looking at are within the four business lines that we have, and we are seeing many different small projects. For the biomethane that we just discussed, we won't expect huge CapEx during 2022. We can see some small CapEx on the vinasse concentration in the face of higher fertilizer prices. Increasing the vinasse concentration and applying more organic fertilizers is very, very profitable on top of that, which makes us more sustainable and generates more CBios. The payback period for this type of investments is less than 2 years, and the returns are very high. We also see attractive opportunities in the farming business, specifically within rice. The performance of being able to develop a genetic of rice and selling a specific variety to clients and maximizing prices through that route is placing us in a very attractive position. But again, all of the opportunities we are looking at today are within our existing businesses where we feel very comfortable about the returns.
Christian Audi, Analyst
Great. And can you give us a sense as you analyze these opportunities, what levels of return do you use as a threshold in order to pursue them, please?
Mariano Bosch, CEO
Yes, certainly. The threshold for different businesses and how sustainability impacts them varies. Generally, most of the opportunities we are considering offer returns above 20% to 25% IRR, with some reaching up to 50% IRR. The IRR we are aiming for is quite attractive for us.
Christian Audi, Analyst
Great, very helpful. And then if you could just comment on your outlook for sugar and ethanol prices, please?
Mariano Bosch, CEO
Yes, sure. As we've been anticipating, we are in a very constructive mood regarding sugar and ethanol prices with petroleum at $80 and the relations between importing and exporting in Brazil, hydrous and anhydrous ethanol at still a very favorable scenario especially when we talk about the anhydrous scenario. That's why you saw that at the end of this quarter we were full of inventories. The same thing applies for the sugar prices. We were anticipating this frost effect that we were talking about in our previous calls. I think it was clear that the effect was there and the increase in prices came. For the next year, until the second half of the year, we see the scenario very constructive for both sugar and ethanol prices. Renato, do you want to add something to this sugar and ethanol scenario?
Renato Junqueira-Santos Pereira, Analyst
Yes, can you hear me or not?
Mariano Bosch, CEO
Yes, perfectly well.
Renato Junqueira-Santos Pereira, Analyst
Yes, just to add that we don't think that the Brazilian crop will have an important recovery next year, because of the reduction of the 18 months planting, because of the dry weather that impacted that type of planting. Also, the frost and the fires we were mentioning before will impact the first half of next year in Brazil, the supply of TRS for the first half of the year. There is a probability there will be a reduction in the sugarcane area of about 3% next year. So the Brazilian crop is not going to recover much. There are some recovery in some countries like India and Thailand, but in lower proportions, than what Brazil is supposed to reduce. We think that the global deficit in sugar is around 3 million tons. The scenario for next year is going to be very, very good as we were discussing here. If the oil prices remain at current levels, and the auto cycle is increasing, there will be a healthy competition for sugar and ethanol at the TRS of the cane, so probably the mix can be impacted and these debts can be even higher.
Operator, Operator
Thank you. Ladies and gentlemen, our next question comes from Lucas Ferreira with JPMorgan. Please go ahead. Lucas, your line is open.
Lucas Ferreira, Analyst
Good morning, everyone. Thank you for the chance to ask questions and congratulations on the distribution policy. I wanted to follow up with Mariano and Charlie regarding the policy. I'm curious about the leverage limit you anticipate. While we have some insight into the minimum payments, what could the potential payments be in light of your CapEx plan? What leverage limit do you aim to maintain? Given your currently low leverage and the absence of major topics in the pipeline, could you clarify what leverage you are considering? This would help us understand the possible payments to shareholders. Now, I have a question for Renato. I noticed you have a significant amount of inventory for the upcoming quarter, particularly in sugar. Could you discuss your commercialization strategy? Are you expecting a shortfall in the ethanol market? Do you anticipate companies will be importing ethanol in the first quarter? What does the inventory situation look like? Additionally, could you explain why you have such high sugar inventory for the next quarters? Thank you for the opportunity.
Mariano Bosch, CEO
Hi, Lucas. Thank you for your question. Regarding the distribution policy, I think that's pretty much in line with what we've been saying. This area of below 2x EBITDA that leverage is an area where we feel comfortable. We feel that our company is generating very good results and sustainable cash flows. But we want to maintain our leverage in a safe area. We all know Latin America. So we want to maintain ourselves in a safe area in terms of net debt. So most of what we've been saying today regarding our distribution policy has already been mentioned. This 40% of the net cash from operations is a minimum to which we are committing ourselves. We don't want to have excess cash in the company, nothing like that. You can see how we've been managing the company in the last years. That's regarding the distribution policy. And regarding your questions on pricing, I would like Renato to answer precisely.
Renato Junqueira-Santos Pereira, Analyst
Hi, Lucas. We also remain very optimistic about the sugar market. I think the Brazilian crop this year is going to be something close to 520 million tons, much below than everybody was expecting. Therefore, the supply of cane is much lower than previously thought. Oil prices and the economic recovery are supporting higher sugar prices. That's why it's a being a strategy to carry our stocks for the fourth quarter. Regarding the sugar property, we're going to be selling a portion of our sugar in this fourth quarter. Today, we have about 85% of our sugar production priced at 16 cents per pound. Thus, we still have to price approximately 75,000 tons. In the biomass front, we have carried the stocks into the last quarter, and now we are starting to sell ethanol at very high prices. Currently, we are selling ethanol at prices equivalent to about 22 cents per pound. I think it's very attractive. We're probably going to keep selling something now and something in the first quarter of next year to resist the price, which will remain very attractive.
Mariano Bosch, CEO
Before finishing the call, I wanted to thank you all for joining the conference. The market outlook of the products that we purchase is looking promising and we are in a unique position to continue to take advantage of such favorable scenarios. We are confident that we will continue delivering strong financial results and we will continue to distribute to our shareholders, now in a more structural way. Lastly, I would like to reiterate my gratitude to all our operating teams that are doing an outstanding job and our shareholders for their continued support.
Operator, Operator
Thank you ladies and gentlemen. This concludes today’s conference call. We thank you all for attending.