May 16, 2011

Brazilian Ethanol Exports Continue to Decline

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

The Brazilian government has been slow in issuing export permits for ethanol leaving the country. Government officials claim the 30-day delay in issuing the export authorizations was just a bureaucratic snafu, but industry officials suspect it was an attempt by the government to slow exports thus putting downward pressure on sky-high domestic ethanol prices.

Without the export authorization, vessels loaded with ethanol are not allowed to leave the port. As of late last week, there were three vessels loaded with 50 million liters of ethanol waiting at the port for permission to leave. The delays have cost the shipping company approximately US$ 50,000 which is being passed on to the sugar/ethanol mills that allowed the vessels to be loaded without securing the needed export authorizations. Government officials say that the situation should be cleared up soon.

Government interference in the ethanol market points to a larger problem in the supply/demand situation of Brazilian ethanol. Ethanol supplies in Brazil tighten during the intra-harvest period of December to March. In recent years, the tight supplies have resulted in rising ethanol prices at the pump during this period. Ethanol prices in Brazil during April hit record highs due to very tight supplies.

The supply shortage is usually quickly rectified as soon as the new sugarcane harvest begins in March, but heavy rains during March and early April slowed initial harvest activities.

Brazil exports the ethanol not consumed by the domestic market, but domestic demand has increased significantly in recent years thus forcing downward pressure on Brazilian exports. Brazilian ethanol exports peaked in 2008/09 at 4.7 billion liters, but have been declining since due to increased domestic demand. In 2011, Brazil is expected to export 1.45 billion liters of ethanol, which is down considerably from the 1.8 billion liters exported in 2010.

The domestic demand for ethanol started to increase rapidly after the introduction of flex fuel vehicles in 2003. Since their introduction, flex fuel vehicles have accounted for over 90% of all new vehicle sales in Brazil. These vehicles can utilize the E100 ethanol sold at every Brazilian gas station or the E25 gasoline that is common in Brazil. During the months of February, March, and April, Brazilian motorist were purchasing more gasoline than ethanol due to the high price of ethanol. This resulted in a shortage of gasoline which forced Petrobras to import gasoline during that period.