The Center-South Brazil ethanol market has returned to a supply-driven parabolic price phase after only two months since the last similar extreme price movement.
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S&P Global Platts assessed Center-South hydrous ethanol at a record Real 3,600/cu m on May 5, up Real 395, or 12.3%, on the week. The Center-South hydrous ethanol price is up 45.5% thus far in 2021.
Bullish supply reports, dry weather in the Center-South, high sugar production premium, and favorable economics over gasoline have driven hydrous ethanol to a record high on fears over a short-term ethanol supply shortage.
"Ethanol prices have dramatically increased in a short period of time because ethanol stocks are extremely tight," said a Sao Paulo-based trader. "The market's tremendous ongoing upward price movement will attain a price which effectively stymies demand or incentivizes mills to switch more cane crushing toward ethanol production over sugar production."
Bullish Ethanol Supply Reports
An ethanol inventory report released on April 30 showed a drop of 205 million liters in ethanol stocks between the official start of the harvest and April 16, according to the Ministry of Agriculture, Livestock and Supply.
Center-South mills sold more ethanol than they produced in H1 April with 730.5 million liters being produced and 960.75 million liters being sold, according to sugarcane group UNICA.
Hydrous ethanol production accounted for 626.06 million liters of the total, while anhydrous ethanol output was 104.49 million liters, UNICA said.
The quantity of hydrous ethanol sold was 650.50 million liters, 14.67% higher on the year. The quantity of anhydrous ethanol sold was 293 million liters, 47.15% higher on the year, it said.
"Center-South mills have primarily focused on maximizing their sugar production since the harvest started on April 1, and harvest delays due to poor cane development and high sugar production premiums have kept ethanol production at suboptimal production levels," a second Sao Paulo-based trader said. "Resilient demand for hydrous and anhydrous ethanol is outstripping the current supply of ethanol in the Center-South."
Platts assessed hydrous ethanol ex-mill Ribeirao Preto converted into raw sugar equivalent at 16.55 cents/lb on May 5. The July NY11 sugar futures contract settled May 5 at 17.53 cents/lb, providing a 0.98 cent/lb premium to hydrous ethanol in raw sugar equivalent.
Dry weather may lead to reduced sugarcane yield
Ongoing dry weather in the Center-South has increased expectations for a reduced sugarcane yield for the 2021-22 crop season and associated drop in ethanol production.
Center-South H1 May rainfall is expected to be 93% below average, 1 mm instead of 15 mm. Center-South H2 May rainfall is expected to be 12% below average, 44 mm instead of 50 mm.
"Much needed rainfall in H2 May could be a huge relief for sugarcane suffering from persistent dry weather since the start of the harvest, but if rains do not arrive in H2 May or if June experiences reduced rainfall, the likely negative impact will be sugarcane yields dropping to a 560-570 million mt yield for the 2021-22 harvest and thus lower production of ethanol," said a third Sao Paulo-based trader.
Southeastern hydrous ethanol economically advantageous over gasoline
Hydrous ethanol was economically advantageous over gasoline for drivers in southeastern Brazil, weekly data showed.
In the week ended May 1, the Southeast hydrous ethanol price ratio to gasoline was 69.18%, almost 1% below the 70% threshold that encourages consumers to fill their tanks with hydrous ethanol, or E100, according to data released May 1 by the National Petroleum and Biofuel Agency.
The current absolute price differential was Real 1.70/l between gasoline and hydrous ethanol (E100) at the majority of gas stations in the Center-South on May 1, well above the renowned Real 1.00/liter mark, which will drive consumers to fill their cars with hydrous.
"In addition to the current hydrous ethanol price ratio to gasoline below 70%, the current absolute price differential of gasoline and hydrous ethanol at the majority of gas stations in the Center-South is approaching Real 2.00/liter, well above the infamous Real 1.00/liter mark, which will drive consumers to fill their cars with hydrous," said a Rio de Janeiro-based trader.
Consumers with flex-fuel vehicles can fill their tanks with either gasoline, which has a blend of 27.5% anhydrous ethanol, or E100. Consumers generally fill their tanks with E100 only when its price is 70% or less than the gasoline price, because of hydrous' lower energy content or if the absolute gasoline to E100 price premium increases well above the Real 1.00/liter mark.