Jul 23, 2010
Higher Brazilian Ethanol Prices in 2010 Leads to Reduced Sales
Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.
Higher ethanol prices in Brazil during the first half of 2010 resulted in a 17% drop in ethanol consumption compared to the same period in 2009. During the same period, gasoline consumption in Brazil increased 22%. According to the National Petroleum Agency (ANP) ethanol consumption in Brazil during the January to May period totaled 5.3 billion liters compared to 6.4 billion liters during the same period in 2009.
The high ethanol prices during the first half of 2010 were the result of several factors. The principal reason for the higher prices was the adverse weather during the last half of 2009. The sugarcane harvest in Brazil usually ends by December with the new harvest beginning in March or April. The seasonal tendency for ethanol prices in Brazil is to increase between harvests due to reduced supplies.
The supplies were reduced even more than normal this year due to heavy rains in southern Brazil in late 2009 that prevented the harvest of some of the sugarcane in Sao Paulo and it lowered the sucrose content of the sugarcane that was harvested. At the same time, world sugar prices hit a 30 year high and sugar mill operators opted to increase their sugar output to take advantage of the higher prices. This in turn reduced the ethanol supplies even more.
Additionally, during much of 2009, ethanol prices were below the cost of production and many ethanol producers were forced to sell down their inventories in order to meet operating expenses. These lower prices led to increased sales of flex fuel vehicles and high consumption of ethanol. The result was very tight supplies of ethanol and high prices.
Owners of flex fuel vehicles have the option of using ethanol or gasoline depending on the price ratio between the two fuels. Any time ethanol prices are more than 70% the price of gasoline, it is more economical to use gasoline. During the first three months of 2010, ethanol prices in much of Brazil ranged from 70% to 75% the price of gasoline and as a result, consumers used less ethanol and more gasoline.
Ethanol prices in Brazil have retreated over the last few months, but they are still expected to remain relatively high during the second half of the year.