Brazil's ethanol production premium surpasses 200 points over sugar

Brazilian ethanol's growing production premium to sugar -- a measure of which product is most profitable to produce -- reached 208 points as of April 1, according to data from S&P Global Commodity Insights.

A 7.8% jump in Brazil's Center-South hydrous ethanol price combined with a 6.8% appreciation in the real against the dollar from March 10 to April 1 were the primary reasons for ethanol's spike in production premium. NY11 May sugar futures posted a meager 1.4% price rise over the same period.

The ethanol production premium to sugar in Brazil moves closer to 240 points if decarbonization credits, CBIOs are added into the premium calculation. The CBIO, equivalent to 1 mt of carbon dioxide not released in the atmosphere, is an instrument issued by biofuel producers and importers to ensure Brazil attains its future decarbonization targets.

Ethanol premium to sugar

"Although the 2022-23 crop should witness a relatively high sugar mix around 42-44% compared to 45% for the 2021-22 crop, the recent favorable premium for ethanol production over sugar production will encourage mills to divert sucrose to ethanol production for the first few months of the crop cycle," said a Sao Paulo-based trader.

Hydrous ethanol ex-mill Ribeirao Preto converted into raw sugar equivalent provided an average 0.90 cent/lb premium to NY11 front month sugar futures in H2 March, according to data from S&P Global Commodity Insights.

"Crushing is expected to be primarily focused on sugar production during the second half of the harvest, unless appreciation in the Brazilian real against the US dollar and further gains in Center-South hydrous ethanol continue to outpace any increase in the price of sugar," said a second Sao Paulo-based trader.

When Center-South mills maximize their ethanol production, a monthly average up to 2.5 billion-3 billion liters of ethanol can be produced. On the other hand, if mills maximize their sugar production over ethanol production during the harvest period, a monthly average up to 1.7 billion-2 billion liters of ethanol can be produced.

Given current monthly ethanol demand of around 1.9 billion-2.4 billion liters, this ability to add or subtract hundreds of millions of liters per month to the supply of ethanol is a huge factor in the price discovery mechanism for ethanol prices throughout the year.

Brazilian mills, which are flex mills, have the unique ability to make minute adjustments in the ratio of their ethanol and sugar production based on which product is paying the highest market premium. These quick adjustments implemented by hundreds of flex mills situated in the Center-South can increase or decrease the potential supply of ethanol in the hundreds of millions of liters and affect the future sugar supply in the millions of metric tons.

Exchange rate volatility

Volatility in the exchange rate between the Brazilian real and the US dollar will continue to drive Brazilian ethanol mills' decision making in 2022 to prioritize ethanol or sugar production.

The exchange rate of the real against the dollar will also decide the volumes of ethanol imported into Brazil from abroad and ethanol volumes exported from Brazil due to arbitrages opening and closing in international ethanol markets.

The most recent price data of the Brazilian real/US dollar exchange rate has a current 100-day historic volatility of 17.99% compared to the US Dollar Index having a 100-day historic volatility of 5.66%.

An 17.99% 100-day historical standard deviation points to the probability that the Brazilian real within the next 100 days could potentially experience a 17.99% price move, either an appreciation or depreciation against the US dollar. This would mean a real-to-dollar exchange rate potential trading band of Real 5.51/$1 to Real 3.83/$1 in the next 100 days.