New York — There is a consensus among the majority of market participants in Brazil that there will be a supply shortage of anhydrous ethanol in the NNE within 3-6 months and, ultimately, prices will rise to the DAP Suape delivered price.
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Current expectations range from a shortage of 50,000-150,000 cu m of anhydrous ethanol in the NNE.
That shortage will ultimately be covered by more expensive ethanol imported from the US, albeit as a last resort. But, until then, cheaper anhydrous ethanol including corn based anhydrous ethanol will flow to the NNE from other regions of Brazil and immediate surrounding countries.
The sugar and corn based anhydrous ethanol that will flow to the NNE of Brazil from the various regions in Brazil will increase in price over the next 3-6 months until it reaches parity with the price of imported ethanol from the US.
Once price parity is attained, a deluge of ethanol exports will be unleashed from the US to cover any remaining demand in the NNE, thus capping anhydrous ethanol prices in the NNE at the then current DAP Suape delivered price.
Brazil has extended its quarterly tariff free import quota, which had expired on Aug. 31, by an additional 90 days. The import quota allows 187,500 cu m liters to enter the country without 20% import tax, with further 90-day extensions likely into 2021.
Substantial volumes of ethanol imported from the US should only start to occur when all regions of Brazil have exhausted their available supplies of anhydrous ethanol to be delivered to the NNE at prices below the DAP Suape delivered price.
There will also be cargoes of ethanol imported from nearby countries including Paraguay and Bolivia, but the quantities will be too small to cover the total ethanol supply shortage in the NNE.
Cost of delivery within Brazil
The freight cost to deliver ethanol from the Center South is approximately Real 420/cu m ($75/cu m) depending on the addition of logistical and storage costs. The total freight cost from other regions of Brazil to the NNE vary widely and can be as high as Real 600/cu m from the more remote regions of Brazil.
Subtracting the total freight, logistics, and storage costs from the DAP Suape delivered price will give the short-term maximum price of anhydrous ethanol in the various regions of Brazil including the Center South region.
Dap Suape delivered price, closed arbitrage
S&P Global Platts assessed anhydrous DAP Suape for the week ending Oct. 9 at Real 2,710/cu m, a new record high since Platts started assessing DAP Suape in October 2017.
According to calculations by Platts, anhydrous ethanol imported without the 20% import tax from the US was valued at Real 2,939/cu m DAP Suape on Oct. 9.
The current arbitrage for ethanol delivered from the US to the NNE is closed by Real 229/cu m, thus distributors in the NNE will naturally favor purchasing cheaper ethanol in various regions of Brazil with a delivered price far below imported ethanol from the US.
Dap Suape volatility, future price expectations
The DAP Suape anhydrous ethanol price has experienced extreme price movements in 2020 because of the inherent volatility in US ethanol prices and the extreme price swings in the Brazilian real versus the dollar.
The previous 10-week historical volatility for the DAP Suape anhydrous ethanol price has been 12.07%.
A 10-week historical standard deviation of 12.07 percentage points to a probability that the DAP Suape anhydrous ethanol price within the next 10 weeks, or by Dec. 31, could potentially experience a 12.07% price move, either an increase or decrease of Real 327/cu m.
That would mean a DAP Suape anhydrous ethanol potential trading band of Real 2,383/cu m to Real 3,037/cu m within the next 10 weeks.
S&P Global Platts assessed domestic anhydrous ethanol in the Center South region at Real 2,395/cu m ex-mill Ribeirao Preto on Oct. 9.
Taking the historical 12.07% 10-week volatility of DAP Suape anhydrous ethanol prices into account and assuming freight, logistics, and storage costs remain fairly constant, there is a high degree of certainty that the CS anhydrous ethanol price will be capped at Real 2,617/cu m (Real 3,037 cu m minus Real 420/cu m in total delivery costs from the CS) or 9.3% higher than the current price by the end of 2020.