August 26, 2011

Domestic Ethanol Prices Spike Higher in Brazil

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

The domestic price of ethanol in Brazil is already surging higher even though the sugarcane harvest in Brazil won't end for another three more months. Normally during this time of the year when the sugarcane harvest is still in progress, ethanol supplies are ample and prices are low, but that has not been the case this year. The problem this year is the fact that the sugarcane tonnage is going to be significantly lower than in 2010/11. As a result, ethanol production in Brazil could be down by as much as 15%. The government is trying to limit the consumption of ethanol now in order to extend limited supplies into the intra-harvest period (January to March). If they don't limit consumption during the second half of 2011, prices could spike even higher in early 2012.

In the city of Cuiaba, which is the capital of Mato Grosso, ethanol prices have increased 20% over the last week going from an average of R$ 1.66 per liter to R$ 1.99 per liter (US$ 3.94 per gallon to US$ 4.72 per gallon). Gasoline prices also increased as well going from R$ 2.67 per liter to R$ 2.89 per liter (US$ 6.34 to US$ 6.86 per gallon), but gasoline prices increased only 8% compared to the 20% increase for ethanol. As a result, ethanol prices are now 69% the price of gasoline and approaching the 70% mark which is when ethanol becomes uncompetitive with gasoline.

Since there is less energy stored in ethanol, any time ethanol prices are more than 70% the price of gasoline, it is more economical to use gasoline and that is exactly what owners of flex fuel vehicles do in Brazil. Every time they fill up their car they can make a quick calculation and decide which fuel is more economical, E100 ethanol or E25 gasoline.

In August of 2009, the price of ethanol in the city of Cuiaba was R$ 1.07 per liter (US$ 2.54 per gallon) and in some cases as low as R$ 0.99 per liter (US$ 2.35 per gallon). In August of 2010, it was R$ 1.50 per liter (US$ 3.56 per gallon).

Due to the long term nature of sugarcane production, there is no time frame for when ethanol prices might come back down in Brazil. The sugarcane harvest of 2009/10 and 2010/11 were disappointing due to adverse weather and now the 2011/12 harvest is disappointing as well due to a series of frosts over the last two months. Even if farmers would plant additional sugarcane acreage in early 2012 (there is currently no indication that they will), the first harvest for the newly planted sugarcane is 18 months after it is planted. Therefore, any sugarcane planted in early 2012 won't be harvested until late 2013.

With that being the case, it is possible therefore that the 2012/13 sugarcane harvest in Brazil could be disappointing as well. It will take a minimum of 3-5 years of increased investments in the sugar/ethanol sector in Brazil before the country's ethanol production can catch up with the increased domestic demand for ethanol.