When you’re sitting on a shed load of sugarcane, it’s nice to know you have options. For Brazil, as the powerhouse of global sugar production, that choice falls into two broad areas — make sugar, or make ethanol.
With Brazil’s car fleet thoroughly geared up for ethanol consumption, an estimated 26 billion liters of ethanol is set to be produced to meet that domestic demand. Brazilian drivers opt to fill their tanks with gasoline or hydrous ethanol depending on the price of the fuel at the pump. The price of hydrous ethanol, which has a lower energy content than gasoline, is considered an attractive alternative for consumers if it is less than 70% of the price of gasoline.
But the competitiveness of ethanol versus gasoline at the pumps could yet shake out further demand from end users, while the relative profitability of ethanol versus sugar means that sugar stocks could dwindle in the key Center-South region. Maintaining the delicate equilibrium is key, as we ask the question whether 26 billion liters of ethanol will be enough for Center-South Brazil.
Every year, at the start of the crop in Center-South Brazil, the same questions arise: What will the sucrose mix be and how much sugar will ethanol take out? In years of (cumulative) surplus, the interest is even higher. At one time, many were predicting the end of ethanol/sugar flexibility in Brazil, but that’s ancient history now. The recent switch in both foreign exchange rates and ethanol prices to ethanol’s favor has raised some eyebrows and many questions about the sugar mix, millers’ preferences and their plans for the current crop.
What are prices telling us? If we do the calculations today, taking into consideration the forex curve, BMF hydrous futures and physical sugar values, we can see that when compared to sugar, ethanol pays better at the peak of the crop. The most surprising thing is that this situation has come about in less than a month. It would be hard to estimate now the extent to which millers’ plans have changed on ethanol production, and how much sugar could be lost as a result. These hard maths are not the only factor affecting millers’ decisions; using the BMF hydrous contract in the calculation has its limitations and, after all, these calculations and the implied profitability of the products might change very quickly.
For the moment, and regardless of the final mix, the rain that has fallen in many cane regions, as well as seasonality, indicate most mills will be maximizing ethanol production at the beginning of the harvest. This means that, according to our calculations, not much sugar is available in CS Brazil at the moment — we estimate that total stocks by mid-April were less than 500,000 mt in the region.
The prospects for hydrous demand: Unica’s latest data showed that total domestic hydrous ethanol sales from mills have increased substantially in March and first half of April. We estimate most of this increase was from fuel ethanol, as the hydrous ethanol/gasoline parity at the pump has improved in favor of ethanol. Sources say fuel distributors usually keep low stocks of hydrous, typically sourcing it on a hand-to-mouth basis. Even if part of this increase in mills’ sales could be attributed to the end of the fiscal year in March and their desire to clear stocks and raise fresh money to start the new harvest, we still believe the constant improvement in hydrous’ competitiveness at the pump should signal a real pick-up in demand.
Should this situation continue the question becomes whether the 26 billion liters of ethanol production that we currently have in our estimates would be enough to cover fuel and industrial demand, internal transfers and some 800-900 million liters of exports. If the extra anhydrous demand from the higher blend has already been taken into account, the answer to that question will depend on the ethanol/gasoline parity at the pump and any extra demand for hydrous ethanol that it tempts. The increase in gasoline taxes in February also gave a boost to ethanol sales, as gasoline passed the psychological Real 3/liter. If the parity remains below 65% as is currently the case in Southeast Brazil, more hydrous ethanol would be needed and it is unlikely this will come from the US, unless prices are so competitive that the US anhydrous ethanol would then be re-hydrated.
Playing around with scenarios: If it transpires that an extra 500-700 million liters of ethanol production is needed this season, where could it come from? In our first scenario, let’s assume the extra production to come from an increase of 5 million mt in cane crush and a decrease in sugar mix by 1 point to 43%. The impact on sugar production would be a loss of 440,000 mt. In a second scenario we could assume the extra ethanol production to come from a switch of 1% of the sugar mix toward ethanol. In this case, the impact would be a loss of about 720,000 mt of sugar (ceteris paribus).
But there are other possible scenarios that should not be ignored because hydrous ethanol demand could be even higher if the ethanol/gasoline parity strongly favors ethanol or if it lasts for longer. In this extreme case, if we would need to add an extra 2 billion liters of ethanol into the equation from our current estimate, keeping ATR unchanged as well as total cane crush, the sugar mix would have to go down to 39.7% (from 44% in our base scenario), meaning a loss of sugar production of about 3.2 million mt. One could argue that this is highly unlikely because sugar prices would soon react to that loss and attract that sucrose back to the sugar factory and away from the distillery.
Whether Brazil can hit the sweet spot, keep the sugar market stocked while meeting the energy demand from the country’s motorist remains to be seen, and a range of scenarios could yet unfurl. As ever, as the crop gets underway, both the world’s sugar and ethanol industry will keep a very close eye on what it means for them.
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The post More of Brazil’s sugar scooped up for ethanol, but sweet spot elusive appeared first on The Barrel Blog.