February 4, 2013

Ethanol Blend to Increase from 20% to 25% in Brazilian Gasoline

To the relief of the sugarcane and ethanol producers in Brazil, the Brazilian government announced late last week that the percent of ethanol blended into Brazilian gasoline would be increased from 20% to 25% starting in May. The mixture had been at 25% until October of 2011 when it was reduced to 20% in order to extend tight ethanol supplies due to poor sugarcane harvests. The increase had been requested by ethanol producers in order to increase the demand for the fuel.

The poor sugarcane harvests over the last several years have set off a series of events in Brazil that are still unfolding. The poor harvests resulted in tight ethanol supplies that drove up prices at the pump for E100 fuel. Since more than 50% of the cars on the road are flex fuel vehicles, Brazilian motorists can choose to purchase E100 or E20 (E25 starting in May) every time they fill up their vehicle. If the price of E100 is less than 70% of the price of gasoline (E20), it is more economical to use E100. If the price of E100 is more than 70% the price of gasoline, it is more economical to use gasoline.

For most the last two years, Brazilian motorists have been opting for more gasoline, which has caught the Brazilian oil giant Petrobras by surprise. Gasoline consumption had been declining while ethanol consumption had been increasing, therefore Petrobras does not have enough gasoline refining capacity to meet the increased demand for gasoline. This forced Petrobras to greatly increase gasoline imports. They were forced to purchase the gasoline at higher prices than they were allowed to sell it domestically, thus they lost an estimated US$ 10 billion on these gasoline imports in 2012. The Brazilian government held down the price of gasoline as a way to limit domestic inflation. In a sense, the government was subsidizing the price of gasoline.

The lower gasoline prices forced ethanol prices lower as well. These lower prices, combined with softening sugar prices, have pushed some ethanol producers into the red. The industry realized that the quickest way to reverse this trend would be to increase gasoline prices, which in turn would allow ethanol prices to rise as well. The gasoline prices in Brazil are now scheduled to increase 6.7%.

An increase in ethanol prices would be welcome news for producers struggling to turn a profit. While sugarcane production has been disappointing for several years, the cost of production in the form of inputs, labor, and land have continued to increase. The consulting agency Datagro calculates that the cost of producing sugar in Brazil this harvest season was 21 cents per pound, which was higher than the price paid for the sugar. The combination of losing money on sugar and weak ethanol prices has put the squeeze on sugarcane producers. With increased efficiency, Datagro expected costs to produce sugar to decline to 18.5 to 19 cents in 2013/14 and eventually settle into the range of 16-17 cents per pound.