April 12, 2011

Ethanol Demand in Brazil may Outstrip Production Capacity

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

Rains have delayed the start of the sugarcane harvest in southeastern Brazil and as a result, ethanol prices have spiked as domestic supplies have dwindled. In the city of Sao Paulo, ethanol prices surged 16% during the first few days of April. For three consecutive years in a row the domestic supply of ethanol has fallen short of demand during the intra-harvest period of January to March. Industry officials are now worried that the internal demand for ethanol in Brazil may start to outstrip the industry's production capacity.

The demand for ethanol continues to accelerate as the Brazilian economy grows at a rapid pace and more Brazilians purchase flex fuel vehicles. Over 90% of all new car sales for the last several years have been flex fuel vehicles that can use either E100 ethanol or E25 gasoline, which is a mixture of twenty five percent ethanol in gasoline.

The National Center for Sugarcane Industries and Biofuels issued an urgent letter to its members that the ethanol situation in Brazil has reached a critical juncture. They feel they could lose the hard won confidence that they have gained from consumers over the last decade if they cannot guarantee an adequate year round supply of ethanol for the domestic market.

In fact, the recent prices increases for ethanol in Brazil made it economically viable to import ethanol from the United States over the last few months in order to meet internal demand.

Seasoned veterans of the industry remember when the Brazilian government started their alcohol program in the 1970s. So many alcohol cars were purchased by Brazilian consumers that the demand for alcohol soon surpassed the production capacity of the industry. The alcohol cars at the time did not have flex fuel engines so they had to burn pure alcohol. With chronic shortages of alcohol at gas stations, the sale of alcohol cars soon plummeted and the industry really didn't recover until the introduction of flex fuel vehicles.