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April 15, 2014

Brazil May Increase Ethanol Blend in Gasoline from 25% to 27.5%

The new Brazilian Minister of Agriculture, Neri Geller, is currently in negotiations with the Minister of Mines and Energy, Edison Lobao, concerning the possibility of increasing the percentage of ethanol blended into Brazilian gasoline. The current percentage is 25% and he is proposing increasing that to 27.5% as a way to increase ethanol consumption and also to help control inflation during a presidential election year in Brazil.

In their latest assessment of the 2014/15 Brazilian sugarcane crop, Conab estimates that the production of anhydrous ethanol used to blend with gasoline will increase 8.7% to 15.5 billion liters. The production of hydrous ethanol, which is burned directly in vehicles as E100, is expected to decline 5.6% to 12.8 billion liters.

The Minister feels that a higher percentage of ethanol could help to avoid another increase in gasoline prices after the 4% increase of last November.

At the recent Sugar & Ethanol Brazil 2014 meeting held in Sao Paulo, the president of Unica (Union of Sugarcane Industries) Elizabeth Farina indicated that during the last five years, 44 sugar mills in Brazil have closed their doors and 12 have suspended operations. According to officials from Odebrecht Agroindustrial, if the sugar sector does not improve, another 45 mills may close their doors in the near future and take with them 160,000 jobs both directly and indirectly.

Everyone agrees that one way to improve the sector is to increase the consumption of ethanol. After a poor sugarcane harvest two years ago, the percentage of ethanol blended into gasoline was reduced from 25% to 20%. After ethanol stocks recovered, the blend percentage was again returned to 25% a year ago.

According to the consulting firm F.O. Licht, sugarcane production in southern Brazil in 2014/15 will decline 3.5% to 575 million tons. They estimate that entanol production will decline slightly from 25.5 billion liters to 25.3 billion liters. They estimate that sugar production will decline 9.3% from 34.3 million tons in 2012/14 to 31.1 million tons in 2014/15. The reduced sugarcane production is the result of a severe drought in December and January and a series of frost that occurred in mid-2013.

Motorists in Brazil can choose between gasoline blended with 25% ethanol (E25) or 100% ethanol (E100) every time they fill up their vehicle. Most cars in Brazil are now flex-fuel and the decision to purchase E25 or E100 depends on the price differential between the two fuels. If the price of E100 is more than 70% the price of gasoline, then it is more economical to use gasoline. If the price of E100 is less than 70% the price of gasoline, then it is more economical to use E100.

Therefore, one way to increase the consumption of E100 would be to increase the price of gasoline, but the government does not want to do that because it would have inflationary pressures. But, if the blend percentage was increased, ethanol consumption would increase regardless of the price differential between the two fuels.