May 19, 2011

Brazil Urgently Needs New Sugar/Ethanol Mills to Meet Demand

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

The demand for ethanol in Brazil is growing so fast that according to the president of Union of Sugarcane Industries in Brazil (Unica), Marcos Jank, the country urgently needs to increase the number of sugar/ethanol mills in the country or run the risk of running out of ethanol in the future. The rapid increase in the number of flex fuel vehicles in Brazil (over 90% of all new cars in Brazil are flex fuel) has overwhelmed the capacity of the sugarcane industry in Brazil to keep up with the demand. As a result of tight supplies, ethanol prices reached record levels in Brazil this past April and many motorists opted to use gasoline instead of E100. Brazil's ethanol exports have also been steadily declining as internal demand heats up.

Brazil's sugar/ethanol mills have a capacity to process 640 million tons of sugarcane per year and if all the mills in Brazil expanded their production capacity to their maximum, they could process 960 million tons of sugarcane by the year 2020. The increase of 320 million tons of capacity actually would fall short of the 400 million ton increase needed just to meet the anticipated increase in domestic demand.

To eliminate the rapid decline in ethanol stocks and the resulting high prices, which is what occurred during March and April of this year, Jank and others in the industry feel that the government needs to immediately set up a program to help finance the storage of ethanol needed to carry the country through the intra-harvest period which will begin again next January. He feels it would be better to start storing the ethanol during the early harvest when prices are usually cheaper. Additionally, he feels that distributors should also be required to carry enough anhydrous ethanol on hand to maintain the standard E25 blend (25% ethanol blended with gasoline).

The federal government has tried to give incentives for ethanol producers and distributors to build enough storage capacity to meet the domestic demand during the intra-harvest period, but like so many other infrastructure projects in Brazil, they always seem to be playing catch up.