April 19, 2011

Ethanol Producers in Brazil Can't Keep up with Internal Demand

Sugarcane production in south-central Brazil is expected to increase 2.1% in 2011/12, but the internal demand for ethanol is expected to increase 7% in 2011. Tight supplies of ethanol drove prices to near record levels in early 2011 and ethanol supplies are expected to remain very tight through the 2011/12 growing season.

Sugarcane processors in Brazil had hoped to get off to a quick start in harvesting the 2011/12 sugarcane crop, but wet weather continues to delay the start of the harvest. The south-central region of Brazil is responsible for 90% of Brazil's sugarcane production and mills in the region are expecting to process 2.1% more sugarcane than in 2010/11. The sugar/ethanol mills in south-central Brazil are expecting to process 568 million tons of sugarcane in 2011/12 compared to 556 million tons in 2010/11.

For the last two growing seasons, adverse weather has negatively impacted the sugarcane production in Brazil resulting in very tight supplies of ethanol in Brazil. The state of Sao Paulo is the largest sugarcane producing state in Brazil and total tonnage is expected to decline 4 million tons compared to last year. The reason for the decline is the prolonged dry season in 2010 that severely impacted the development of the sugarcane crop. The state of Parana is the fourth largest producing state and sugarcane tonnage in the state is expected to increase 2 million tons compared to last year.

Ethanol supplies have also tightened because mill operators have devoted more of their production capacity to produce sugar due to the very strong sugar prices. While ethanol supplies have tightened, the sale of flex fuel vehicles in Brazil continues to soar. Between January and March of this year, flex fuel vehicle sales increased 8%. During the first three months of the year, 900,000 flex fuel vehicles were sold in Brazil compared to 836,000 during the same period in 2010. These flex fuel vehicles can burn E100 or E25 (a mixture of 25% ethanol in gasoline) depending on the price of both fuels.

Members of Unica (Union of Sugarcane Industries) are concerned that consumers may turn against ethanol if prices remain high due to tight supplies. They are stressing the urgent need to ramp up production and to build enough storage to even out the peak and valleys of the ethanol supply. They are also concerned that exports of ethanol will decline as internal demand increases leaving the United States as the principal exporter of ethanol in the world.