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Brazilian hydrous ethanol prices break record high for 2018-19 crop

Sao Paulo — Brazilian hydrous ethanol prices in the major fuel-consuming region of Center-South Brazil surged Real 100/cu m in the last four working days, triggered by a combination of bullish fundamental aspects. S&P Global Platts assessed hydrous ethanol ex-mill Ribeirao Preto, including taxes, at Real 2,200/cu m on Wednesday, the highest assessed price since the beginning of the 2018-19 CS crop on April 1.

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Despite the uptick in the ex-mill price, the biofuel might continue to offer a better financial option to flex-fuel vehicles as the parity against gasoline might not be aggressively changed. Hydrous ethanol, E100, competes with gasoline at the pump when its price is 70% or less of the gasoline price due to the lower energy content. According to the National Petroleum Agency, or ANP, the price parity in the week ended September 30 in the southeast states was at 59.13%, down 7.39 percentage points year on year.

Even with a surge of Real 330/cu m year on year, the biofuel is still the best economic choice for flex-fuel cars.

The main price support has been the upward trend in Brent crude prices, which on Wednesday climbed to a four-year high. The most active December contract experienced an intraday high of $86.74/b and settled at $86.20/b.

Brazilian ethanol producers have been following that price trend closely and have been carrying record hydrous ethanol inventories to the intercrop season, usually from December to March. Hydrous ethanol stocks in Brazil's Center-South region as of August 31 totaled 6.2 billion liters, almost 80% higher year on year, data from the agriculture ministry showed. S&P Global Platts Analytics estimates that hydrous ethanol stocks could jump to 6.7 billion liters by the end of September, which would be 54% higher year on year.

Even with fundamentals pointing to an upward price trend in the spot market, some producers were concerned about possible lower consumption due to the high prices and were willing to settle long-term contracts of hydrous ethanol for the intercrop period. Market sources said that these contracts have been priced against a weekly spot index, which might plunge in the event of fewer buyers in the spot market.

"It is a high-risk strategy, as it might lower the spot liquidity and lower the whole index," a trader from major distributor company said. He added that buyers could also lose out on long-term contracts if spot prices fall.

"No one wins, everybody loses," he said.

A second large distributor considers this contract strategy a tool to limit spot market exposure. "We work with a term contract volume, which is controlled to lower our market exposure," the trader said when asked about the risks of carrying stocks that are more expensive than the spot market.

Some of the largest Brazilian ethanol producers approached by Platts said they have not yet settled any long-term hydrous ethanol contracts, but would not dismiss the possibility. -- Nicolle Monteiro de Castro, nicolle.castro@spglobal.com

-- Edited by Annie Siebert, annie.siebert@spglobal.com