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Record Brazil Ethanol Production May Still Not Be Enough To Meet Demand

By Marcelo Teixeira

SAO PAULO, Dec 30 (Reuters) - Brazil has never produced as much ethanol as it did in the current season, an all-time high around 35 billion liters, and yet available stocks may not be enough to meet demand over the down-period between crops.

Ethanol production stops in mid-December in Brazil's main center-south cane belt, returning near April when mills start sugarcane processing for the new season. During that period, the market is basically supplied by stocks, imports and the much smaller production in the Northeast region.

"We don't see a comfortable stock situation this year. Consumption levels are very high. We believe the market will be very tight around February or March," said Matheus Costa, a sugar and ethanol analyst with broker INTL FCStone.

Both production and demand are at record levels in Brazil this year. Monthly hydrous ethanol sales in the center-south surpassed 2 billion liters for the first time, in October, as owners of flex-fuel cars turned to cheaper ethanol to escape higher gasoline prices.

Michael McDougall, managing director at New York-based futures broker Paragon Global Markets LLC, sees total ethanol offer in Brazil's center-south from now through March, including carry-over stocks, of 7.62 billion liters.

That, he says, would not be enough to maintain current levels of demand around 2 billion liters of hydrous ethanol per month.

"So, we obviously can't survive on zero stocks. The price will have to (and already is) rise to cut back on consumption," he said in a note to clients.

In fact, hydrous ethanol prices this month in Sao Paulo surpassed for the first time 2 reais per liter ($1.88 per gallon), considering the value at the mill gate, before taxes, according to research center Cepea/Esalq.

Sugar and ethanol consultancy JOB Economia sees carry-over stocks at the end of the season, in March, at similar levels to those in the previous season, around 2.8 billion liters, considering hydrous and anhydrous.

JOB's partner, Julio Maria Borges, agrees prices will rise to cut back demand so there will be enough ethanol in the market until the next crushing season.

He also says the import window is open for United States ethanol.

"Imports in the tax-free quota of 750 million will happen for sure," he said, adding that the Northeast Brazil will likely also import ethanol beyond the quota, paying the 20% tax, in a volume around 300 million liters from February.

(Reporting by Marcelo Teixeira; editing by Nick Macfie)

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