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September 30, 2015

Ethanol now more Competitive than Gasoline in Brazil

Since most of the cars in Brazil are flex-fuel vehicles, every time Brazilian motorists fill their tanks they can choose either 100% ethanol (E100) or gasoline blended with 27% ethanol (E27). Since ethanol contains 70% of the energy of gasoline, if the price of ethanol (E100) is less than 70% of the price of gasoline (E27), consumers are better off purchasing E100.

According to data from the National Petroleum, Natural Gas, and Biofuels Agency (ANP) and the Center for Advanced Economic Studies (Cepa/Esalq/USP) the price of E100 in the city of Sao Paulo is now 61.2% of the price of gasoline (E27), which is the lowest it has been in five years. The last time the price was this favorable for E100 was in September of 2010 when it was 58.5% of the price of gasoline.

E100 has now been more competitive that gasoline for 16 consecutive months in Sao Paulo. E100 is also more competitive than gasoline in the states of Mato Grosso, Minas Gerais, Parana, Goias, and Mato Grosso do Sul. As a result, Brazilian consumers are purchasing more E100.

This is exactly what the sugar/ethanol sector in Brazil has been hoping for because they have been in financial trouble for a number of years due to low sugar prices and government policies that favored lower gasoline prices as a way to control domestic inflation. For years, Petrobras was forced to sell gasoline and diesel at prices below what it paid to import the fuel. This practice costed the Brazilian government billions of reals, but the politicians felt it was necessary as a way to combat inflation, especially those politicians who were up for reelection.

Ethanol producers complained bitterly that the policy was also holding down ethanol prices and driving many sugar/ethanol producers into bankruptcy. After Dilma was reelected president in October of 2014, the policy changed and gasoline and diesel prices increased significantly in Brazil. This was good news for ethanol producers because it made their fuel more competitive in the marketplace. After the readjustment, Petrobras set the price of gasoline in Brazil at 8% above the international price and diesel was priced at 17% more than the international price.

Needless to say, big consumers of diesel, such as trucking companies, complained that they were now the ones being driven out of business because their cots increased but the freight rates had not increased enough to cover their increased fuel costs. That was the primary reason behind the three-week truck driver strike earlier this year in Brazil.

The situation for the sugar/ethanol sector has improved somewhat, but what they really need are higher sugar and ethanol prices at the same time.