March 14, 2011

Ethanol Prices in Brazil Rise Awaiting New Sugarcane Harvest

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

Seasonal ethanol prices in Brazil generally increase during the January to March period due to tight ethanol supplies. That has been the case again this year as ethanol prices have topped R$ 2.00 per liter (US$ 4.50 per gallon) in many regions of Brazil. The sugarcane harvest in Brazil generally ends in mid-December and resumes in late March. During the time when no harvesting is taking place, ethanol supplies start to dwindle and as a result, prices increase. Once the sugarcane harvest resumes in late March or early April, ethanol supplies increase and prices decline once again.

Owners of flex fuel cars in Brazil can decide at the pump if they want to use ethanol (E100) or gasoline depending on the price of each fuel relative to each other. Ethanol contains about 70% of the energy contained in gasoline, so if ethanol prices are more than 70% the price of gasoline, it is more economical to use gasoline. In many parts of Brazil the price of ethanol is above that 70% threshold and as a result, consumers are purchasing less ethanol and more gasoline. Over 90% of all the new car sales in Brazil are flex fuel vehicles.

In Brazil, ethanol prices have risen more than gasoline in recent weeks prompting consumers to purchase more gasoline while they wait for ethanol prices to weaken. Gasoline prices in Brazil have not risen to the extent that they have in the rest of the world primarily because of the small amount of petroleum imported into Brazil. When instability in the Middle East drives up petroleum prices, Brazilian consumers see only marginally higher gasoline prices.

Even though ethanol prices have reached or surpassed the R$ 2.00 per liter level, some Brazilian continue to purchase the higher priced ethanol because they feel that ethanol burns cleaner and they are concerned about air quality and they also want to support Brazil's renewable fuel program.

The Brazilian government is trying to smooth out the supply and demand disconnect by encouraging more construction of ethanol storage, but it has been a slow process.