Ethanol demand in Brazil, the largest sugar producer, is set to gain as the price of the biofuel at the pump is now more competitive than gasoline, according to Sao Paulo-based trader and producer Copersucar SA.
Ethanol prices are 62 percent to 63 percent that of gasoline, a level that will start attracting demand, Luis Roberto Pogetti, chairman of Copersucar, said in an interview in London today. Brazilian flex fuel cars can run on either a mix of ethanol and gasoline or pure biofuel. Filling up with ethanol usually becomes more advantageous than with gasoline at the parity of 65 percent, researcher Datagro Ltd. estimates.
Millers in Brazil’s center south, the main growing region, will direct less cane to making sugar this season from a year earlier as ethanol will be more profitable, Pogetti said. The share of cane used to make the sweetener in the 2013-14 crop year that started in April will be 43 percent, lower than the market expectation of 45 percent, he said. Last year, 49 percent of cane was used to make sugar, industry group Unica data show.
“If the current parity is maintained, we start to stimulate demand,” he said. “When the harvest started, the price of ethanol fell fast at the producer level, but it didn’t fall as fast at the pump. It took some time for this to reach consumers.”
The sugar cane crop in the center south will be a record 590 million metric tons this year, according to Copersucar. Sugar production will reach 35 million tons and ethanol output will be 27 billion liters (7.1 billion gallons), Pogetti said. Last year, millers made 34.1 million tons of sweetener and 21.4 billion liters of biofuel, data from Unica in Sao Paulo showed.
Unseasonal wet weather in the region interrupted harvesting and about 10 days of crushing this season has been lost, he said. Millers may not be able to process all of the crop if the rain continues, he said.
Brazil will also make more ethanol as a falling local currency means that millers now have the opportunity to export to the U.S. to meet the advanced biofuels mandate, he said. The Brazilian real fell 9.4 percent in the second quarter, making it the worst performer in a basket of 24 emerging market currencies tracked by Bloomberg. Changes to currency have also made it unlikely that Brazil will keep importing corn ethanol from the U.S., Pogetti said.
“If you look at corn futures and the exchange rate, it’s not viable to have business from the U.S. to Brazil,” he said, referring to ethanol imports. “At the same time, we now have a positive arbitrage for exports of advanced ethanol to the U.S. This is one more economic incentive to make ethanol.”
While a weaker currency has increased the opportunity to export ethanol to the U.S., a large corn crop there will mean that Brazil’s biofuel shipments will drop from a year earlier, Copersucar forecasts. Ethanol exports from the center south will be 2.5 billion liters in 2013-14 from 3 billion liters a year earlier, according to Pogetti.
A falling real has meant that the price at which millers favor ethanol over sugar is now lower, he said. The biofuel is now 17.5 cents a pound, compared with 18-19 cents Copersucar had forecast earlier this year, he said. Even with the fall, ethanol is still trading above raw sugar at 16.28 cents a pound on ICE Futures U.S. in New York.
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