BRAZIL: Mills expected to favor ethanol due to reduction in sugar prices

Published: 08/04/2017, 3:25:12 PM

Brzilian mills are expected to start reducing sugar production and increase ethanol output this season due to the 23% drop in sugar prices this year and after the government reviewed the PIS/Cofins taxation on the biofuel downward, according to analysts and representatives of the sugarcane sector, according to Brazil's Broadcast Agro newswire.

Continued increases in gasoline prices by state-owned oil company Petrobras is another factor that should favor ethanol competitiveness.

Plinio Nastari, president of consulting firm Datagro and member of Brazil's National Council for Energy Policy (CNPE), estimates that some mills should intensify the migration to ethanol production by August. 

Brazilian mills have been prioritizing sugar production since the start of the 2017/18 season in April to meet contracts set last year. 

"Between the end of last year and the beginning of this year there was an opportunity to hedge sugar between 19 cents and 22 cents per pound. Producers in the centre-south have been busy in producing sugar to comply with export commitments signed for that price level," Nastari said.

Sale of sugar that hasn't had prices fixed in prior contracts are now advantageous only to producers located close to ports, which have lower costs and can sell the product at current prices, between 13 cents and 15 cents per pound.

"From August onwards, especially for producers located in the interior of Brazil, the impetus for sugar manufacturing is diminishing," Nastari said. "Regardless of the recovery of ethanol competitiveness, the orientation is for the production of the fuel."

Luiz Carlos Corrêa Carvalho, advisor at sugarcane industry association UNICA and partner at consulting firm Canaplan, believes that mills will continue to favor sugar production until September to store the product in the expectation of better prices. He explained that the current rainless period with low humidity is beneficial for the increase of sucrose content in sugarcane.

"The market has not yet understood that the Brazilian crop will be smaller than last year and when this occurs, sugar prices will rise again," he said. Carvalho believes that ethanol production will be prioritized only in the last quarter of the season.

Celso Junqueira Franco, president of the association of bioenergy producers Udop, agrees that there has been an increase in ethanol competitiveness after the government reduced PIS/Cofins taxation, but he added that at this moment of the harvest mills hardly have technical and operational flexibility to increase ethanol production.

"In October and November, with more rain and with the fall in ATR (Total Recoverable Sugar) in processing, this migration to ethanol should happen," he said.

However, ethanol production may be limited between October and December, due to the decrease in sugarcane volumes available for processing, given that cane crush this season is going fast, without long interruptions related to rainfall.