Brazil ethanol prices plunge on weaker economic data,drier weather

Sao Paulo — Hydrous ethanol prices in Brazil's Center-South plunged 2.5% Thursday as a combination of weaker than expected economic growth, forecast for dry weather in March, and recent historically high prices led to the sell off.

The prices declined to Real 2,500/cu m from Real 2,565/cu m on Wednesday.

Offers were heard at Real 2,530/cu m and trades heard at Real 2,500/cu m ex-mill Ribeirao Preto throughout the day.

Brazil's gross domestic product grew 1.1% last year, after expanding 1.3% in each of the previous two years, the Brazilian Institute of Geography and Statistics, or IBGE, said Wednesday. The weakest underlying factors of GDP growth were a 3.3% decline in business investment and a 0.4% decline in agribusiness activity.

Although GDP was positive, it was well below the expected 2.5% annual growth rate and dampened expectations for positive economic growth in 2020. Market participants were also expecting additional headwinds to the economy from the spread of the coronavirus.

Lower economic growth results in a decrease in manufacturing and transportation activity, which leads to less demand for fuel including ethanol. Although the supply and demand picture has remained bullish for the past several months, Wednesday's GDP figure paints a dimmer picture for the future demand for ethanol in Brazil.

Meanwhile, updated long-term weather forecast for the state of Sao Paulo were predicting a minimal amount of rainfall in March, which means there will be no delay in the harvest and mills should be able to start producing ethanol before the end of March. Timely harvest means no supply shortage of ethanol which was a possible scenario even a few weeks ago.

S&P Global Platts' hydrous ethanol ex-mill Ribeirao Preto assessment averaged above Real 2,500/cu m in January and February, up 25% from the assessment average in January and February 2019. Given the news of lower than expected economic data and lower than expected rainfall in March, mills in the Center-South raced to sell ethanol to take advantage of the recent historically high prices. Larger producing mills in the Center-South are expected to aggressively sell ethanol next week according to several market sources.

The Brazilian real has depreciated 3.1% against the US dollar Thursday to Real 4.6483/$1 from Real 4.5080/$1 last Friday.

The local currency fell against the US dollar because traders were anticipating a further reduction in interest rates by the Central Bank of Brazil at the upcoming meeting in response to the weaker than expected GDP figure and fears over the spread of the coronavirus in Brazil.

Weakness in FOB prices were exacerbated on Thursday because of the depreciation in the Brazilian real against the US dollar. FOB Santos anhydrous ethanol for loading 10-30 days forward was assessed Thursday at $500/cu m, a decrease of $21/cu m from Wednesday. Platts assessed Grade B, FOB Santos for 20-30 days forward loading at $504/cu m, a decrease of $20/cu m from Wednesday.