February 4, 2011

Ethanol Prices in Brazil Makes it Uncompetitive with Gasoline

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

The prices for E100 ethanol in Brazil have reached a point where it is not competitive with gasoline in the majority of the Brazilian states. Due to the less amount of energy contained in ethanol, for the fuel to be competitive with gasoline it cannot be priced more than 70% the price of gasoline. As of the end of January, the average price of E100 ethanol in Brazil was R$ 1.867 (US$ 4.24 a gallon) and the average price of gasoline was R$ 2.608 per liter (US$ 5.93 a gallon). Therefore, E100 ethanol was 71.5% the price of gasoline making it more economical for the average motorist in Brazil to use gasoline. If the price of gasoline remained unchanged, E100 ethanol will be competitive if it was priced at R$ 1.825 or less.

Therefore, in 21 of the Brazilian states, gasoline was more competitive than E100 ethanol at the end of January, in two states E100 ethanol was more competitive, and in three states it was a tossup.

In the state of Sao Paulo, which accounts for nearly 60% of the sugarcane production in Brazil, the average cost of gasoline was R$ 2.475 per liter (US$ 5.63 per gallon) while E100 ethanol was R$ 1.732 per liter (US$ 3,94 per gallon) which is 70% the price of gasoline or at the breakeven point.

The two states where E100 was less competitive were Rio Grande do Sul and Roraima. E100 ethanol prices in these two states were 83% and 82% the price of gasoline respectively. Ironically, these two states are the southernmost and northernmost states in Brazil and the furthest away from the major centers of ethanol production. The prices for E100 ethanol in two big farm states such as Mato Grosso and Goias was 68% and 69% respectively.

There is a seasonal tendency for ethanol prices to increase in between sugarcane harvests. The sugarcane harvest winds down during the month of December and the harvest activity resumes in March or April. In between that time, ethanol prices can spike like it did one year ago. In fact, ethanol prices got so high in February of 2010 that the federal government lowered the percentage of ethanol in gasoline from 25% to 20% as a way to extend the limited supply.

The federal government has been trying to smooth out the highs and lows of the ethanol market by encouraging the construction of ethanol storage, but it has been a slow process.