Brazilian regulator's new biodiesel price mechanism raises uncertainty among stakeholders

Brazil's National Agency of Petroleum, Gas and Biofuel, or ANP, published on Jan. 14 the first price series regarding the volumes traded under term contracts in the period between Jan. 3 and Jan. 9 but it raised market uncertainty about the methodology supporting the published numbers and the relevance of the information for decision makers.

As the Brazilian biodiesel trading dynamic shifted on Jan. 3 from an auction model to a partially spot and partially term contract model, ANP included biodiesel on its weekly price report, which consider price paid for producers and importers of oil and biodiesel, however market participants were not confident with the methodology used by ANP to weight all the gathered information.

The main point of concern referred to the high premium price observed in south Brazil over the national average price.

"I did not recognize any price correlation with our own deals in the same period," said one of the top producers from Rio Grande do Sul state.

According to ANP, biodiesel invoices released from south Brazilian producers regarding the product officially traded under term contracts in the mentioned period, were at a weighted average price of Real 6,826.01/cu m, up 4.23% from the Brazilian average price of Real 6,548.95/cu m, while in the 2021, when the market was still trading within the auction system, biodiesel from south Brazil traded at an average discount of 2.53% over the national average.

While some sources pointed that the price distortion could be associated to a seasonality, others mentioned that many invoices were not officially registered in the ANP system due to technical problem, triggering a relevant information asymmetry in the market.

"Producers had until Jan. 13 to upload invoices in the ANP system, however a technical problem in the platform avoided us to do so," said one of the three Brazilian largest producers, who affirmed that all their invoices were not uploaded in the system.

In the addition to the price distortion in the south region, when comparing to the average auction price of 2020, in the Northeast region the opposite was observed.

Northeast Brazil has a well-known structural deficit of biofuels – ethanol and biodiesel – and for that reason on a historical analysis biodiesel price was always traded at a premium over the national average in the auction system. However, data published by ANP regarding the period between Jan. 3 and Jan. 9, showed it at a discount.

Data from ANP showed that biodiesel invoices released from northeast Brazilian producers regarding the product officially traded under term contracts in the mentioned period, were at a weighted average price of Real 6,425.66/cu m, down 1.88% from the Brazilian average price, while in the 2021, within the auction system, northeast producers received an average premium of 5.83% over the national average.

There was a high consensus between producers and distributors that the ANP published price was not reflecting most part of their deals in the first week of January and that this lack of market confidence in the first official price point published could be negative for the market development in the early stages of the new trading system.

An alternative to avoid that kind of asymmetry could be to include the volume of biodiesel traded in each region in the specific week, to give stakeholders the possibility to measure how representative was the volume traded in each region to capture the price information, sources said.