Ethanol prices in Brazil's Center-South expected to top record highs in near term

Ethanol prices in Brazil's Center-South continue to hit record highs daily because of high demand, small volumes being offered in the spot market, and overall tight stocks.

"Ethanol prices remain firm and on an upward trajectory because ethanol stocks are relatively low given current demand is increasing to prepandemic levels, which should push Center-South ethanol prices above Real 4,000/cu m" said a Sao Paulo-based trader. "Ethanol prices will need to attain a price which effectively neutralizes demand for upward price momentum to stop."

Multiple frosts in the Center-South, high sugar production premium, bullish supply reports, and a favorable price over gasoline have been the underlying bullish themes for the majority of 2021.

S&P Global Platts assessed hydrous ethanol ex-mill Ribeirão Preto at Real 3,855/cu m on Aug. 16, a record high price, up Real 2,255/cu m, or 141%, from the lows witnessed in April 2020.

Platts assessed domestic anhydrous ethanol at Real 3,900/cu m ex-mill Ribeirão Preto, a record-high price, up Real 2,265/cu m, or 138%, from the lows experienced in May 2020.

"The third frost event for the 2021-22 harvest in the Center-South region, which occurred during the second half of July, has drastically reduced total cane crush and total ethanol production forecasts," according to an S&P Global Platts Analytics analysis. "The revised Center-South Brazil 2021-22 cane crush estimate stands at 522 million mt, down 11.5% from an original estimate of 590 million mt at the start of the harvest, which ultimately will lead to less ethanol produced."

Anhydrous ethanol production premium turns negative

"Center-South mills took advantage of the anhydrous ethanol production premium peaking at 200 points over the sugar production premium during the last several months to meet the increasing demand for anhydrous, but now with the recent surge in NY11 October sugar futures breaking through 20.00 cents/lb, the premium has turned negative for both anhydrous and hydrous, and most mills will maximize their sugar production over any kind of ethanol production," a second Sao Paulo-based trader said.

Platts assessed anhydrous ethanol ex-mill Ribeirao Preto converted into raw sugar equivalent at 20.00 cents/lb on Aug. 17. The October NY11 sugar futures contract settled Aug. 17 at 20.02 cents/lb, providing a 0.02 cent/lb premium to hydrous ethanol in raw sugar equivalent.

The anhydrous ethanol ex-mill Ribeirao Preto converted into raw sugar equivalent value is always greater than the converted hydrous ethanol value because anhydrous ethanol is free from the 13.3% ICMS tax, a state-level sales tax imposed on the physical movement of merchandise.

Platts assessed hydrous ethanol ex-mill Ribeirao Preto converted into raw sugar equivalent at 17.89 cents/lb on Aug. 17. The October NY11 sugar futures contract settled Aug. 17 at 20.02 cents/lb, providing a 2.13 cent/lb premium to hydrous ethanol in raw sugar equivalent.

"With the Center-South region entering their last few months of production before the intercrop season and the Northeast region gearing up for the start of their harvest, anhydrous and hydrous ethanol production will be minimized by mills in favor of maximum sugar production to take advantage of the high sugar production premium over ethanol production," a third Sao Paulo-based trader said.

Southeastern consumers favoring hydrous ethanol over gasoline

In the week ended Aug. 14, the current absolute price differential was Real 1.522/l between gasoline and hydrous ethanol (E100) at the majority of gas stations in Brazil's Center-South, above the psychologically significant Real 1/l mark, which typically encourages consumers to fill their cars with hydrous.

The Southeast hydrous ethanol price averaged Real 4.281/liter against an average price for gasoline at Real 5.803/liter for the week ending Aug. 14.

The average absolute price differential in H1 August was Real 1.545/l, a slight decrease from Real 1.5515/l in H2 July.

The average absolute price differential in H1 July was Real 1.4785/l.

"Southeast gasoline prices nearing Real 6/l is driving consumers to fill their cars with less expensive hydrous ethanol with prices closer to Real 4/l," said a fourth Sao Paulo-based trader.

Although Center-South ethanol prices are at historical highs, the pass-through of hydrous ethanol price increases at mills located in the Center-South along to the consumer at the pump has an average five to 15-day time lag, dependent on the speed and extent of the movement in ex-mill prices.