Nov 13, 2009
Flex-fuel Vehicles Allow Brazilians To Choose Most Economic Fuel
Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.
Domestic ethanol prices in Brazil continue to rise due to a temporary shortfall in ethanol production and a shift by mill operators to produce more sugar and less ethanol. The result has been sharp increases in ethanol prices for Brazilian consumers, but with more flex-fuel vehicles now on the road, Brazilians can choose which fuel they want to put into their vehicles.
In the state of Sao Paulo, the largest sugarcane producing state in Brazil, ethanol prices have risen 28% since June and 14% just since the beginning October. During the month of October, the average ethanol price in the state of Sao Paulo increased from R$ 1.306 per liter to R$ 1.501 per liter or US$ 2.92 per gallon to US$ 3.35 per gallon (the exchange rate used for the conversion was 1.7 Brazilian reais per U.S. dollar). Due to the reduced mileage achieved when using ethanol, any time the price of ethanol exceeds 70% the price of gasoline, it's more economical to use gasoline. In some gasoline stations in Sao Paulo, the price of ethanol is now 71% to 73% the price of gasoline, thus its better to use gasoline.
In the city of Sao Paulo, the price of ethanol varies greatly between regions. In the suburb of Santo Amaro, ethanol is selling for as much as R$ 1.50 per liter (US$ 4.40 per gallon), but in the eastern part of the city, it is selling for a little as R$ 1.199 per liter (US$ 2.68 per gallon).
The advantage of flex fuel vehicles is that they allow Brazilian drivers to compare prices at the pump and to choose the most economical fuel. Additionally, a growing number of Brazilian cars offer the driver a third option, burning natural gas instead of gasoline or ethanol. These tri-flex cars give Brazilian drivers the ultimate choice in fuel selection.
One of the reasons for the shortage of ethanol has been heavy rain in the state of Sao Paulo over the last few months, which delayed the sugarcane harvest and lowered the sugarcane yield. The other reason is due to mill operators adjusting their mills to produce more sugar and less ethanol. World sugar prices are very attractive and as a result, there is a greater margin in producing sugar instead of ethanol.
World sugar prices are high due to increased demand and India changing from a sugar exporter to a sugar importer. As a result sugar mills in Brazil have been gearing more of their operations to produce sugar instead of ethanol. In 2008 approximately 40% of Brazil's mill capacity was used to produce sugar and 60% was used to produce ethanol. In 2009, that has changed to 45% being used for sugar production and 55% used for ethanol production.
Sugar exports from Brazil are expected to increase and ethanol exports are expected to decrease, at least temporarily. During 2008-09, Brazil exported 4.5 billion liters of ethanol and that is expected to fall to 3 billion liters in 2009-10. The new sugarcane harvest in Brazil will resume in early 2010, but in the meantime, the government is considering lowering the ethanol blend in Brazilian gasoline from 25% to 20% as a way to stretch existing supplies.