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Adecoagro SA (NYSE:AGRO)
Q2 2020 Earnings Call
Aug 14, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

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 2020 Results Conference Call. Today with us, we have Mr. Mariano Bosch, CEO; Mr. Charlie Boero Hughes, CFO; and Mr. Juan Ignacio Galleano Investor Relations Manager. [Operator Instructions] After the Company's remarks are completed, there will be a question-and-answer section. [Operator Instructions]

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 -- Chief Executive Officer and Co-founder

Good morning, and thank you for joining Adecoagro's second quarter results conference. As we all know, this quarter was marked by the spread of coronavirus disease and the global economic slowdown. In such difficult times, our main concern was to continue running all our operations, while ensuring the safety of our people by imposing strict protocols to provide an hygienic and secure working environment. After all the measures taken, we were able to continue operating all our businesses on a regular basis in spite of the pandemic.

We were in a solid position to cope this challenging macroeconomic context thanks to having a diversified product portfolio, the quality of our assets, the flexibility to adapt to changing scenarios and our constant focus on being low-cost producers. All these has allowed us to maintain profitability even in the current circumstances. It has not been easy, but all the hard work put by our teams in the field every day have paid off.

In our sugar, ethanol and energy business, the impact of the disease led to a significant drop in the demand and prices of ethanol and energy, presenting a very challenging scenario for the industry. We rapidly reassessed our strategy to adjust to the new context, starting by switching our product mix toward maximizing sugar which traded at a premium to the ethanol. Indeed, we diverted 54% of the TRS to sugar production compared with 25% during the second quarter of 2019.

In addition to these, we reduced our crushing base, sized down our operations in tandem with the lower volume, implemented cost reduction initiatives, and postponed uncommitted expenses. Our rapid response, especially under such a sudden change in market conditions, allowed us to continue selling our products with the highest marginal continuation and make a more efficient use of our fixed assets. In addition, this base reduction has improved the conditions of our sugarcane plantations to be milled during the second semester of the year. To give you a hint, we resumed our milling base and reached record high milling processing capacity in July.

In our farming and land transformation business, in particular in Argentina, the mandatory lockdown presented many challenges from a logistic and operational point of view. However, we were able to efficiently complete harvesting activities for our rice and most of our crops and transport our production across 10 different provinces. This was only possible thanks to the commitment of our people, many of which were put in [Phonetic] quarantine in order to guarantee their safety and that of their families, while they were performing their tasks.

I would also like to point out the fluid communication we maintained and the good work we did alongside governors, mayors and public entities to successfully bring our products to the consumers in every corner of the country as well as in export markets in the middle of the pandemic. Another great accomplishment we achieved during the quarter was the sale of the farm in Argentina, which provides us additional liquidity. Our financial strategy of strengthening our cash position was another pillar to successfully sail throughout the pandemic. We entered -- as an example, we entered into an eight-year loan of $100 million with the IFC, which together with the results of the Company puts us on a very liquid position.

To conclude, I would like to express how proud I am of the work that we as a company have been doing to overcome the effects of the pandemic. This work did not start a couple of months ago, but years. And I'm very grateful to every single member of the Adecoagro for their ongoing commitment to the Company, for their willingness to come to work every day and for their continuous confidence and support. I know that we still have challenges ahead of us, but I am convinced that we have the right people and that we are following the right strategy to generate good returns and value for our existing shareholders. Now more than ever, we need to remain focused on being low cost producers, enhancing our efficiencies and taking care of our people.

So now Charlie can walk you through the numbers of the quarter.

Carlos A. Boero Hughes -- Chief Financial Officer

Thank you, Mariano. Good morning, everyone. Please turn to Page 4 where I would first like to take a moment to comment on how the dynamics of the Brazilian sugar, ethanol and energy business have been impacted during the second quarter of 2020 as it will be instrumental to understand the decisions we made throughout the quarter.

During this period, Brazilian ethanol business experienced a decrease in prices and demand, mainly explained by the fall in international oil prices as can be seen in the top left chart caused by the oversupply of oil generated by the geopolitical conflict between Russia and the Kingdom of Saudi Arabia. This translated into a decrease in the price of ethanol due to the correlation they maintained as can be seen in the top right chart and by the reduction of people circulation in Brazil as a protective measure in response to the COVID-19, which lead to a natural decline in the demand for fuels and bio fuels such as ethanol as can be seen in the bottom left chart.

The impact of these factors caused the industry to experience a challenging second quarter of the year. April was defined by uncertainty regarding the extent of COVID-19 impact. Indeed, estimates pointed to a 50% year-over-year decrease in demand for ethanol. Actual figures although less negative, still painted a challenging scenario. On a year-over-year comparison, ethanol demand in Brazil declined 28.6%, ethanol prices experienced a 25% decrease, and international oil prices experienced a sharp decline as well.

In addition, ethanol stock levels were high due to carry-over from 2019. Mills across Brazil switched their mix to maximize sugar, which presented higher relative prices, thus limiting the supply of ethanol. During May, international gasoline prices experienced a recovery. And there was at 21.8% month-over-month increase in demand for ethanol in Brazil due to a less restrictive lockdown than originally thought, although year-over-year demand was 27.9% lower. By June, there were signs of recovery. For instance, the year-over-year drop in ethanol demand stood at only 10.5%. Ethanol prices denominated in Brazilian currency were 1.6% higher year-over-year on the account of a favorable FX rate, higher gasoline prices, and the lower supply due to mills diverting their production to sugar which price in Brazilian currency was at historical high levels.

During July, ethanol's fundamentals pointed to a recovery, as seen in an 11% month-over-month increase in demand and only a 9% year-over-year decrease according to UNICA's latest report. Towards year-end analysts estimate a tight supply and demand scenario for ethanol, pointing to a price recovery. This is so because the decrease in demand is expected to amount to 4.9 million cubic meters, while the decrease in supply caused by the generalized shift toward sugar production is expected to stand at 5.5 million cubic meters.

As a side note, I would like to briefly mention that in June 2020, we officially became the first company to commercialize carbon credits under the RenovaBio program, marking a milestone in Brazil's biofuel policy. We are proud of this achievement, which shows our commitment to sustainable operations, and we are confident in the positive impact at RenovaBio we have in the industry.

Now let's move to Page 5 with a brief analysis on the rains in Mato Grosso do Sul. As seen on the top charts, rains in our cluster in Mato Grosso do Sul during the second quarter of 2020 were 12.5% below the 10-year average, but doubled compared to the second quarter of 2019, which registered very dry weather. The distribution of rainfalls, however, was not even throughout the quarter. The rains mostly concentrated in the month of May, improving the outlook for the following quarters.

Let's continue with Slide 6 where I would like to discuss our sugarcane crushing. As mentioned above, we have been following closely the evolution of factors impacting Brazilian sugar, ethanol and energy business and rapidly reassessing our strategy to adjust to the changing scenario. This is why at the beginning of the quarter, we decided to slow down our crushing pace and reduce our level of operations in tandem with the lower volume.

In addition, we implemented a cost reduction plan, which included among others, the temporary suspension of employees under provisional measure 936/20. Thus, allowing us to maintain the workforce sized to our operational needs. However, in light of the signs of partially recovery in June and favored by the dry weather registered in the cluster region, we've begun the process of revamping our operations and accelerating our crushing pace again.

On a quarterly basis, we crushed 2.9 million tons, 28% or 1.1 million tons lower compared to the same period of last year. Our strategy to slow down crushing was evidenced in a 10.1% year-over-year decrease in the effective milling days and a 19.9% decrease in milling per day as can be seen in the top left chart. On a six-month basis, a total of 4.2 million tons of sugarcane were crushed, 21.6% or 1.2 million tons lower than the first six months of 2019, fully explained by the second quarter's dynamic.

We expect to recover this lower crushing volume during the second semester. Indeed, during July, we reached a record high of 1.7 million tons of sugarcane crushed, which on a year-to-date basis reduces the gap versus last year to only 700,000 tons. This improvement in our operations coupled with a positive outlook in terms of productivity will allow us to take advantage of the recovery in ethanol's fundamentals.

Please jump to Page 7 where I would like to walk you through our agricultural productivity. Sugarcane yields during the second quarter reached 81 tons per hectare, 1.5% lower than the second quarter of 2019. In terms of sugar content, TRS during the quarter reached 126 kilograms per ton, in line with the same period of last year. The combination of these two effects resulted in TRS production per hectare of 10.3 tons, 2.2% lower year-over-year.

Year-to-date, yields reached 75 tons per hectare and TRS content 117 kilograms per ton, 11.4% and 4% lower year-over-year respectively. This is explained by the fact that during the first quarter of the year, to profit from very attractive ethanol prices and in order to secure cane availability for 2020, we maximized the harvest of hectares with low productive potential. This strategy allowed the sugarcane with highest potential to continue growing and recover from the impact of the 2019's adverse weather conditions, resulting in a negative impact in both yield and TRS content, which resulted in lower TRS production per hectare.

Let's move ahead to Slide 8 where I would like to discuss our production mix. As you can see in the top left chart, during the second quarter of 2020, ethanol prices experienced a sharp decline. Anhydrous and hydrous ethanol in Mato Grosso do Sul traded an average price of $0.103 per pound and $0.095 per pound sugar equivalent, marking up 4.7% and 11.7% discount to sugar respectively. In this context, all our efforts were focused on maximizing sugar, the product with the highest marginal contribution to which we diverted 54% of the TRS. During the first semester of 2020, as can be seen on the top right chart, we diverted 41% of the TRS production to sugar compared with 20% during 2019.

I would like to insist that this high degree inflexibility constitutes one of our most important competitive advantages, since it allow us to make a more efficient use of our fixed assets and sell the product with the highest marginal contribution. As a result of this strategy, during the first semester of the year, sugar accounted for 36.6% of total EBITDA generation in the sugar, ethanol and energy business considering other operating income, while ethanol accounted for 55%.

Let's please turn to Slide 9 where I would like to discuss quarterly sales. As you can see on the top left chart, during the second quarter of 2020, ethanol sales volumes decreased by 52.3% year-over-year. This is explained by the lockdown measures adopted by some states in Brazil, which negatively affected demand for fuel. Indeed, hydrous ethanol sales were the most impacted, dropping by 67.3% compared to the second quarter of 2019, as liquidity for the product remained limited and there was no clear market price reference. Anhydrous ethanol sales were 29.8% lower compared to the same period of last year, driven by lower gasoline consumption.

Average selling prices per ethanol were lower both measured in reals as well as in U.S. dollars, standing at $0.103 per pound, representing a 32.8% year-over-year reduction and marking a significant discount to sugar. All in all, net ethanol sales during the quarter amounted to $23.2 million, 70% lower year-over-year. In the case of energy, selling volumes reached 259,000 megawatt hour, marking a 17.9% decrease year-over-year, explained by our commercial strategy to postpone energy sales in the spot market in light of the low prices observed during the quarter. Average selling prices were lower both measure in reals as well as in U.S. dollars, standing at $35 per megawatt hour, marking a 28.6% decrease compared to the same period of last year. Overall, net sales were 41.9% lower compared to the second quarter of 2019, reaching $9.1 million.

Sugar sales volumes during the quarter reached 134,000 tons, 48.6% higher year-over-year on the account of the maximization of the sugar production. This was partially offset by average net selling prices measured in U.S. dollars, which dropped by 11.4% to $0.109 per pound, although prices in reals were at its historical maximums, explaining why Brazilian producers continued maximizing sugar. As a result, net sugar sales reached $31.9 million during the quarter, a 20% increase year-over-year.

Finally, to conclude with the sugar, ethanol and energy business, please turn to Slide 10 where I would like to discuss financial performance. Adjusted EBITDA during the second quarter of 2020 was $45.4 million, 44.4% in lower compared to the same period of last year. This was mostly explained by lower net sales, partially offset by cost dilution following the depreciation of the Brazilian real, lower selling expenses as we renegotiated sugar freight costs and paid less PIS/COFINS tax in line with the lower ethanol sales, and lower general and administrative expenses both on the account of currency depreciation as well as genuine savings as part of our cost reduction initiatives.

I would now like to move on to the farming business. Please direct your attention to Slide 12. As of the date of this report, 92.7% of our total planted area was successfully harvested and presented good yields. The remaining hectares are expected to be harvested by early August.

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 during the first semester of 2020 was $64.8 million, 52.9% or $22.4 million higher year-over-year. This increase is fully explained by the dynamics of the second quarter, which generated an adjusted EBITDA of $40.2 million, four times higher year-over-year.

In our land transformation segment, during the second quarter of 2020, we generated a gain of $10.1 million from the sale of 811 hectares of our farm in Argentina, representing our first farm sale in Argentina in five years. On a year-to-date basis, this gain marks a 7.6% increase compared with the $9.4 million results registered during 2019 from the sale of Alto Alegre farm in Brazil.

Adjusted EBITDA in our farming business amounted to $54.7 million during the first semester of 2020 and $30.1 million during the second quarter, three times higher year-over-year. The impact of COVID-19 generated an increase in the demand for rice and milk which we are able to capitalize. During the second quarter of 2020, the crops business generated an adjusted EBITDA of $17 million, $14 million higher compared to the same period of last year. This increase is mainly explained by higher average prices driven by a greater participation of higher value crops such as peanut and sunflower; an year-over-year increase in harvested area in particular in the case of corn, which increased by 22,000 hectares, generating a $4 million gain in changes in fair value; an increase in the mark-to-market of our commodity hedge position; and cost dilution following the depreciation of the Argentine peso.

The rice business generated an adjusted EBITDA of $8.3 million during the second quarter of the year, $5.2 million higher year-over-year. This was driven by an increase in sales generated by a higher demand both in the domestic and export market, driven by countries rebuilding their stocks and increasing consumption,

Coupled with higher average prices as export prices increased and we pushed the sale of higher margin products in the domestic market. The increase in adjusted EBITDA was also due to an increase in the mark-to-market of our biological asset and lower costs in dollar terms.

The diary business generated an adjusted EBITDA of $5 million during the second quarter of the year, mainly driven by higher selling volumes on the account of an increased demand in the domestic market and achieved efficiencies in our vertically integrated operations, including high productivity at the farm level and the flexibility of our industrial assets, which allowed us to benefit from the spike in demand.

Let's now turn to Page 15, which shows the evolution of Adecoagro's consolidated operational and financial performance. Net sales during the second quarter of 2020 reached $181 million, 13. 7% lower year-over-year. This is fully explained by the performance of the sugar, ethanol and energy business, which received the greatest impact from the coronavirus pandemic, which translated into lower prices of sugar, ethanol and energy measured in U.S. dollars and lower selling volumes of ethanol and energy.

Adjusted EBITDA totaled $81.2 million, marking a 6.6% decrease compared to the same period of last year. On an year-to-date basis, net sales reached $332 million and adjusted EBITDA $142 million, 8.5% and 2.1% lower year-over-year.

Please turn to Slide 16 to take a look at our debt amortization schedule. I'd like to highlight that it was not only from an operational and financial point of view that we adapted our strategy in response to the pandemic, we also worked on an integral risk management program to improve our liquidity position in light of such an uncertain scenario. As you know, we started 2020 with a cash position of $290 million. And throughout the year, we reassessed our cost structure, put on hold some uncommitted capital expenditures and raised credit lines to strengthen our cash position and make front to our financial obligations and working capital needs.

Indeed, during the second quarter, we increased our short-term debt position by 23% quarter-over-quarter, by raising short-term working capital lines. It is worth mentioning that much of this debt was raised as a precautionary measure due to the uncertainty in the macroeconomic scenario. And due to the seasonality of our business, our sales haven't been collected yet.

As can be seen in the bottom graph, our pro forma debt amortization schedule improved considerably compared with March 31st of 2020. This is mostly on the account of the $100 million loan agreement we entered with IFC this time for our Argentina operations, which almost doubled the average life of our debt to six years. We are proud of this major achievement, especially given the current global economic situation as it is a reflection of our hard work, solid reputation and the stable outlook of our business. Having received this Green Loan also validates our strong commitment to environmental sustainability.

To conclude, please turn to Slide 17 to take a look at our net debt position. As you may see in the bottom left chart, our net debt as of June 30th of 2020 reached $742 million, $30.2 million or 4.2% higher than the previous quarter, driven by a $31 million increase in gross debt, which amounted to $978 million, 3.3% higher than the previous quarter and cash and equivalents flat at $236 million.

On a year-over-year basis, net debt was 4.3% lower compared to the second quarter of 2019 on the account of higher cash and equivalents, mostly driven by a positive free cash flow during the last 12 months, which fully offset the higher gross debt. We believe that our balance sheet is in a healthy position, not only based on the adequate overall debt levels, but also on the term of our indebtedness, with approximately 75% having a long-term tenure.

Our net debt ratio reached 2.45 times, 6.2% higher than during the first quarter of 2020, but 17.4% lower year-over-year. At the same time, our liquidity ratio shows the full capacity of the Company to repay short-term debt with cash balance without raising external capital. As of June 2020, the ratio, calculated as cash and equivalents plus marketable inventories divided by short-term debt, reached 1.22 times. This number is significantly higher, once we included IFC loan.

Thank you very much for your time. We are now open to questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] The first question comes from Pedro Soares from BTG Pactual. Please go ahead.

Pedro Soares -- BTG Pactual -- Analyst

Yes. Good morning. Good morning, Mariano, and Charlie. I have two questions here on my side. The first one on sugar and ethanol. Could you provide a bit more color on your sugar hedge strategy going forward? We saw hedges for the current crop ramping up this quarter, right? But we're still a little bit below than what we imagined it would be. So it would be nice to hear how this been evolving already in July, August? And also -- and maybe even more important, it will be interesting to hear about hedges for the next crop with the 2021, 2022 harvest as well. We've been seeing a lot of discussions on how Brazilian millers have been accelerating hedges for the next year as well. But the thing is that Adeco hasn't started yet. So should we take from that, that you guys are confident that there is still room for sugar prices to go much beyond where we are today at current sugar price levels? Any color would be great there.

And the second one on your capital allocation. Capex is obviously down year-to-date, probably due to all of the initiatives taken, as you guys said, by the Company to address the pandemic and its impacts. But also, there is a part of this reduction, which is probably related to the fact you guys were already entering the final phase of your five-year expansion plan, right? So how much of this reduction should we assume at a recurring basis? And it would be nice to have a sense on what should be the cruising speed for capex for the next quarters for the group as a whole? That's it. Thank you guys.

Mariano Bosch -- Chief Executive Officer and Co-founder

Okay. Thank you, Pedro, for your questions. I'm going to answer first your second -- the second part of your question, and then I will pass to Renato to answer the -- your first question. So regarding this capital allocation and the less capex that you are seeing, that's part of our structural plan as we've been talking since three, four, five -- three years, four years ago of our five-year plan. 2020 was the year where we were finishing our five-year plan. So most of the growth investments that we did in this five-year plan, is finishing in 2020. So, this is structural regarding our focus and what we've been doing and what we are focusing today. So, that's something that we should continue to see. Then going to the -- to your first question regarding sugar and ethanol and the hedges, I'm going to ask Renato to give you more color on this, please.

Renato Junqueira Santos Pereira -- Director of Sugar and Ethanol Operations

Hi, Pedro. We are positive for sugar prices. And this is because there are some countries that are important suppliers of sugar that are facing some problems. So we have dry weather in Thailand. We have the yellow virus in European Union and we have a draught in Brazil that can be partly compensated by the high TRS, but not fully compensated. On the other hand, we have increased demand from China, Pakistan and Indonesia, demand that no one was expecting. And if you consider that the demand for ethanol will recover next year, this is going to reduce part of the 10 million tons of sugar that Brazil had this year. So we have been progressively increasing our hedging according to the opportunity that we have as we had in the two last weeks. So far, we have currently hedged 80% of the 2020 season at $0.123 per pound and 16% of the 2021 crop at $0.127 per pound.

Operator

Next question comes from Lucas Ferreira from JP Morgan. Please go ahead.

Lucas Ferreira -- JP Morgan -- Analyst

Hi, gentlemen. Good morning. My first question on the -- on sugar and ethanol. Your strategy of doing sort of a lower crushing in the first quarter of the season, I think was very different from what we saw in general for the Center-South, which actually had a very strong start of the season. So wondering what was the strategy there? And I suppose that obviously, the crushing is accelerating a lot. So wondering if that changes anything for the full year, if you can comment on this?

And the second question was about the land sale in Argentina. If you can quickly discuss with us the valuation of this land relative to the typical assessments and the appraisal you guys do every year. And if you still expect to sell more land this year, how is the liquidity of the market? Do you think that was kind of just a one-off thing? Or you feel that the market is improving and that could open opportunities for you to do more land sale in the next few quarters? Thank you.

Mariano Bosch -- Chief Executive Officer and Co-founder

Thank you, Lucas, for your question. Renato will give you more color or will give you the color on the -- your first question and why we took that strategy. So Renato, can you go in deep there, and then I will take the land sales again.

Renato Junqueira Santos Pereira -- Director of Sugar and Ethanol Operations

Okay. Thank you, Lucas. As a consequence of last year's dry weather, we have reduced the crushing pace in the second quarter. And considering the impact of the COVID-19 and ethanol demand and price, we thought it was an appropriate time to do it, giving more time to the sugar cane development and to reduce our harvesting costs, adopting the MP 936. We think it was a good decision as ethanol price and sugarcane yields improved and we'll revert to those measures, reaching an all-time monthly crushing in sugar production record in July, as was already mentioned. The sugarcane yield has also recovered to the levels much higher than the same period of last year.

And I think this strategy is different from most of other mills in Brazil because Mato Grosso do Sul has its own weather dynamics. This is the reason we have the continuous harvest model. So, we have not been affected by the draught that is currently occurring in other regions right now. We had a dry weather in Mato Grosso do Sul last year, which also affected the first semester sugarcane yields. However, the normal range we had this year, we will have a better second semester with certainly better yields than the same period of last year. Different from last year, we will have a slow first semester and an intense second semester in terms of production, as we have already seen in July.

Mariano Bosch -- Chief Executive Officer and Co-founder

Thank you, Renato. Lucas, and also regarding your question of the land sale. As we mentioned, the land sale has been at a price that is 23% above the Cushman valuation, that is an independent valuation that is being done every year, but more relevant or the more relevant thing is that we are seeing that the market has become much more active. We are receiving visits to our farms from different interested parties and we believe that this trend will continue during the next semester. So we will continue seeking for executing more sale.

Operator

[Operator Instructions] The next question comes from Fernanda Cunha from Citigroup. Please go ahead.

Fernanda Cunha -- Citi -- Analyst

Hi. Thank you for taking my questions. So the first one I have is in regards to your strategy to accelerate the crushing rates in the second half. I'm just wondering here trying to do some back of the envelope math. But what kind of -- what level of ethanol are you expecting to reach in the second half in order for your strategy to be successful? And secondly, do you see the fact that a lot of the Center-South mills might end the crop here earlier? Do you see any upside risk to the ethanol price because of that?

And secondly -- and sorry, the second question is in regards to the land sale. You only sold a very small part of the farm, right? Is this an area which you were not using? Or are you going to have to do any kind of leases in other regions or even do a leaseback in the area that you sold? I'm just wondering here the rationale to sell this land right now -- the small part of the land right now. And the third one, if I may, is in regards to capital allocation. It seems given the current scenario that this year, it will still be a difficult year for you to pay dividends. Is there any kind -- do you have any views of when we could be starting to see shareholder returns as a dividend payout? When could we expect that to happen? Thank you.

Mariano Bosch -- Chief Executive Officer and Co-founder

Okay. I will start answering your last question, and then we'll go in deep for the first -- to the other two questions. So regarding your last question of the capital allocation and when are we going to think about this, as we've been explaining in our last years, I would say, today, that we are focusing on return capital to shareholders. That's how we've been approaching this five-year plan that 2020 [Phonetic] so this year that we are going through was going to be the year where we start to see the free cash flow neutral. And in 2021, we became really positive. So we've been always talking about 2021 as a year where we become free cash flow positive.

Today, with this scenario of the pandemic and with this scenario that we are sailing pretty well, as Charlie explained in detail, we are focusing on today and the liquidity of today. So that is today's focus, but of course, you can see our projections, and 2021 should be a very good year. And in that moment, we should start discussing deeper how we see that we are going to return capital to our shareholders. So that is our view today on how are we approaching this.

Then regarding the -- your second question on the land sale. Yes, it is a small part that was sold at a very attractive price. When we see that attractive price is where we think, going forward, of the return of the capital of that land. And so, the IRR that we obtained going forward, maintaining that farm at that price was not enough attractive. And that's why we reallocate that capital to something else, and we sell that piece of land. 800 hectares in that area, we are leasing more than 30,000 hectares. So that is not really relevant in terms of our production mix on the crop production system that we have there. So that is someone willing to write that specific piece of the farm. And he was able to pay a price. That was interesting enough for us to make the decision to sell it. So that's how we approach. And that's why today, we are seeing this market, as I was saying before, that is much more active than what it was in the last four years. So that is regarding the farm side.

And then, I will ask Renato to explain more on this acceleration of -- on our view on our strategy of milling the sugarcane, Renato? And the level of the ethanol price expected etc.

Renato Junqueira Santos Pereira -- Director of Sugar and Ethanol Operations

Thank you, Fernanda. So regarding the ethanol price, we think the outlook for ethanol has substantially improved through the quarter with oil prices bouncing back to $40 per barrel levels, better prospects for demand and lower production by the Center-South mills. From the peak of the restrictions in April, domestic prices have increased by almost 30%, while demand improved 40% in July. In our analysis, the switch in mix toward sugar production will be responsible to reduce it on our production by almost [Phonetic] 6 million cubic meters, and increase sugar in 10 million tons, which is a volume margin enough to offset the loss in demand that we are expecting. We expect a loss in demand between 10% and 12%, which is approximately 4 million cubic meters.

For this region, we expect tight ethanol in this situation in the off-season, in part with gasoline moving from the current 64% to 7% [Phonetic], which should provide an upside in prices between 10% and 15%. And the fact that we have slowed down the crushing pace and have had normal range in the second quarter has improved the sugarcane yields and crushing outlook for the second semester. This is as an example, the sugar cane that we crushed in July had more than 20% increase in yields compared to the same period of last year. Therefore, we are confident we are going to take advantage of those good price by the end of the year.

Operator

Next question comes from Santhosh Seshadri from HSBC. Please go ahead.

Santhosh Seshadri -- HSBC Securities -- Analyst

Hi. Good morning. This is Santhosh here on behalf of Alex Falcao. Thanks for taking up my questions. I'm not sure if my questions have already been answered. So I have a couple here. First, can you walk us through your outlook for the second half of the year, specifically for your farming and land transformation business? I'm just looking for some color in terms of how the seasonality and changes in sales pattern, if any, would shape up your first half versus second half EBITDA split? And can you also give some color on your resales or possibly your order book if possible?

And my second question is on the cost side. You have done a very good job on the cost performance. Can you give us some color on how much of the cost reduction in the sugar business was a result of currency and how much was due to your negotiation and other cost-saving initiatives? Thank you.

Mariano Bosch -- Chief Executive Officer and Co-founder

Okay. Thank you for your questions. Regarding the farming and land transformation, for the second semester, in order to understand the cycle of the farming and land transformation business, in this semester, we are finishing all the harvesting activities. So as Charlie explained in detail, we are at the end of all these harvesting activities that were very challenging because of the pandemic, but the yields that we obtained and the ability and the cost reductions and the efficiencies that we obtained all along the chain to grow to the domestic market or the export market and also the flexibility that we have in all this farming business, including milk, including peanut, sunflower, rice. That flexibility that we have to grow [Phonetic] to the domestic market and to the export market gave us a great possibility in this pandemic because at the beginning the domestic market was very strong. We took advantage of that, then the export markets improved, then we took advantage of the export market. So that is part of the strategy that we defined a couple of years ago that is really paying off today.

We expect that the second semester will continue more or less on the same lines, while we think on all the sales of these things that we are harvesting and that we are finishing the harvesting. So the cash generation will continue to be in line with what we've been seeing this first half of the year. But then, we are starting the new harvest time. So the second semester is where we are planting where we are preparing for our next cycle. And that is also going very well. Everything is very well prepared. Our contractors are ready. Our people say they are starting to plan. So, we are very positive on how it's working and for the future of the whole farming and land transformation business is that we are seeing a very important improvement and we expect to continue to see this.

And then regarding the cost reduction on the sugar and ethanol business, I would say that in general terms, we continue to focus in reals to reduce costs. And that's something that is happening. The level of reducing costs in real is relatively small in terms of percentages. But while we are reducing costs in real, all the depreciation of the real is transforming to cost in dollars. So when we look at the day-to-day operations in Brazil is how to be more efficient with our costs in real terms, then all that is translated into dollars on the translation accounting.

And I don't know, Renato, if you want to add something on this.

Renato Junqueira Santos Pereira -- Director of Sugar and Ethanol Operations

No, just to add that our cost in reals. We are projecting costs in the reals this year close to BRL0.40 per pound.

Operator

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

Mariano Bosch -- Chief Executive Officer and Co-founder

Thank you. And just before we end the call, I would like to especially thank all our stakeholders and really special thank for the people that is working on our fields, especially in these difficult times, and they are doing an amazing job. Now I would also like to remark that the pandemic is still there, and we need to continue focusing on maintaining every line of business, fully operational, and that we are constantly adapting and generating new preventing measures and raising our safety protocols and procedures to keep everyone in healthy conditions. So I hope you all stay safe and healthy. I look forward to talking to you in our next meetings.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Mariano Bosch -- Chief Executive Officer and Co-founder

Carlos A. Boero Hughes -- Chief Financial Officer

Renato Junqueira Santos Pereira -- Director of Sugar and Ethanol Operations

Pedro Soares -- BTG Pactual -- Analyst

Lucas Ferreira -- JP Morgan -- Analyst

Fernanda Cunha -- Citi -- Analyst

Santhosh Seshadri -- HSBC Securities -- Analyst

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