Anhydrous share of Center-South Brazil's total ethanol production to increase in H1 June

The Center-South Brazil anhydrous share of total ethanol produced was 40.3% in H2 May, up from 33.1% in H1 May, according to UNICA.

The Center-South anhydrous share of total ethanol production increased in H2 May because of the increased demand for anhydrous originating from the Center-South and North-Northeast regions.

The increased demand for anhydrous was because of the favorable economics for the consumer to choose gasoline over hydrous ethanol at the pump in the Southeast and the closed import arbitrage in the North-Northeast.

"Center-South mills will continue to increase their anhydrous share of total ethanol produced because of the increased demand in the Center-South and Northeast and the increased profitability of anhydrous ethanol production." said a Sao Paulo-based trader.

Southeast favorable economics for increased gasoline consumption

"The average Southeast hydrous ethanol to gasoline price ratio in H2 May was around 75.8% and the average in H1 June was almost the same at around 75.7%," said a Rio de Janeiro-based trader. "A hydrous ethanol to gasoline price ratio above 75% will most certainly encourage consumers to choose gasoline over hydrous ethanol (E100) at the pump."

Consumers with flex-fuel vehicles can fill their tanks with either gasoline, which has a blend of 27.5% anhydrous ethanol, or hydrous ethanol (E100). Consumers generally prefer to fill their tanks with E100 when its price is 70% or less than the gasoline price, because of hydrous' lower energy content.

The current absolute price differential between gasoline and E100 was Real 1.359/l at the majority of gas stations in Brazil's Southeast region June 12.

The average absolute price differential in H1 May was Real 1.583/l, which decreased to Real 1.3405/l in H2 May.

The average absolute price differential in H1 June was Real 1.374/l.

"The absolute price differential of Real 1.50/l or above combined with an E100 price at Real 3.99/l or below will encourage the psychological behavior of consumers to choose E100 over gasoline, but at the current absolute price differential around Real 1.37/l and an average E100 price at Real 4.30/l, an increasing percentage of consumers will choose gasoline at the pump," said a second Sao Paulo-based trader.

CS ethanol demand and supply

Ethanol production from sugarcane in CS Brazil was 1.99 billion liters in H2 May, up 9.2% from 1.82 billion liters a year earlier, UNICA said. Hydrous ethanol production accounted for 1.19 billion liters of the total, down 7% on the year. Anhydrous ethanol output was 802 million liters, up 47% on the year, data from trade association UNICA showed June 10.

Ethanol production from corn in CS Brazil was 119 million liters in H2 May, up 107% from a year earlier, when 57 million liters produced, UNICA said. Hydrous ethanol production from corn accounted for 75 million liters of the total, while anhydrous ethanol output from corn was 44 million liters.

Ethanol sales by mills in CS Brazil in May totaled 2.32 billion liters going to the domestic market and 147 million liters destined for export. The quantity of hydrous ethanol sold to the domestic market was 1.48 billion liters, 1% higher. The quantity of anhydrous ethanol sold to the domestic market was 840 million liters, 42% higher on the year.

CS to NNE ethanol trade flow 2H May

In 2H May around 140 million liters of anhydrous ethanol were destined for the North-Northeast region and 700 million liters of anhydrous ethanol were destined for the Center-South region, according to multiple market sources.

Increased Center-South anhydrous ethanol transfers to the North-Northeast region occurred because of the closed import arbitrage to bring anhydrous ethanol from the United States into Brazil. The North-Northeast region has a structural ethanol deficit and when the ethanol import arbitrage from the US is closed, the region typically covers its ethanol supply gap with ethanol transfers from the Center-South of Brazil.

The import arbitrage to bring ethanol from the United States into Brazil is expected to remain closed in the near term.