Brazil's Ballooning Ethanol Stockpiles Risk Bringing Sugar Back

July 09, 2018 at 3:45 AM

Surging ethanol stockpiles and tumbling prices for the biofuel risk bringing back more sugar production in top grower Brazil.

Ethanol consumption isn’t keeping up with rapidly rising production, partly due to the recent truckers strike, leaving inventories 72 percent higher than a year earlier. As reserves balloon, prices in Sao Paulo state fell 13 percent in the past month, bringing it closer to sugar and fueling speculation that millers in Brazil’s top growing region may make more of the sweetener than expected.

The biggest sugar glut on record and another surplus forecast for next season has helped push futures traded in New York down about 25 percent this year. That’s made the sweetener the worst performer in the Bloomberg Commodity Index of 22 raw materials and spurred Brazilian millers to try to maximize production of ethanol at sugar’s expense. But soon that could start to change.

“Prices have been coming down, ethanol stocks are building. Demand is strong but is probably not sufficient to clear the stocks,” said Tom McNeill, a director at Brisbane, Australia-based researcher Green Pool Commodity Specialists. “I think this assumption that everyone has made that maximum ethanol is absolutely locked in could be challenged within the next three months.”

Ethanol stockpiles in Brazil’s Center-South stood at about 4.7 billion liters by June 15, helping send prices for the fuel delivered in Paulinia to 1,537 reais ($391) a cubic meter, according to data from the Agriculture Ministry and a University of Sao Paulo research group. A weaker Brazilian real is boosting the attractiveness of sugar exports, which, unlike ethanol, are traded in the U.S. currency.

“If one combines this trend with the concerns that a new Brazilian government elected in October may revert to state control or capping of domestic gasoline prices, thereby making ethanol less competitive at the pumps, this does not bode well for sugar,” said Nick Penney, a senior trader at brokerage Sucden Financial Ltd. in London. “Millers may increase sugar production out of cane to be harvested later in the campaign and export it for hard-earned dollars.”


Sugar Premium

Changing the mix of production back to more sugar will require the sweetener to be at a premium of at least 0.5 cent a pound over ethanol, said Bruno Lima, head of sugar and ethanol at INTL FCStone Inc. in Campinas, Brazil. Millers don’t usually switch when both commodities are at parity because ethanol sales are paid immediately in cash while sugar takes longer, he said.

Ethanol stocks will start to go back to normal levels later in the season as a smaller cane crop means the harvest will end earlier, said Tarcilo Rodrigues, a director at trader Bioagencia in Sao Paulo. While production is now running at a fast pace, the lack of cane means millers will probably close for the season about one and a half months before normal, he said.

“Ethanol stocks should continue to expand until October,” he said. “After that, they will begin to adjust as the inter-harvest period will be longer.”

A switch back to sugar in Brazil would worsen the global rout. India, the No. 2 producer, is set to churn out record amounts of sugar this year and next. Thailand, the world’s second-largest shipper, gathered a record crop this season. In the European Union, the liberalization of the market also boosted output.

“Ultimately, Brazil may end up making more sugar than some people expect simply because the market rewards it to do so,” McNeill said.