Falling Ethanol Prices in Brazil Are a Green Light for Consumption

If you are a producer of ethanol in Brazil, your go-to price reference is the ESALQ hydrous ethanol price for São Paulo state, which is the benchmark price for ex-mill prices excluding taxes. It is a true reflection of what a mill actually receives for ethanol.

If you are a consumer of fuel ethanol in Brazil (i.e. if you have a flax-fuel car and you can choose whether to fill up with ethanol or with gasoline), then the most relevant reference for you is the price of ethanol at the pump. The rule of thumb is that if the pump price of ethanol is 70% or less than the pump price of gasoline, there is an economic incentive to fill up with ethanol. This is because, litre for litre, ethanol contains 70% of the energy of gasoline.

Between the ex-mill price of ethanol and the pump price are a number of additional costs reflecting transport, taxation, and others.

Until recently, millers had been disappointed to see that despite the ex-mill price of hydrous ethanol plunging, as is normal with the onset of the harvest, the pump price of ethanol remained steady. Thus they saw their own prices falling, but with no corresponding fall in the price paid by consumers, which would have stimulated greater offtake (see Figure 1).

This delay in the pass-through of pricing from mill to pump tends to happen every year around the beginning of the harvest, as fuel distributors work their way through stocks acquired at pre-harvest prices. However, the issue has been particularly painful for millers this year as sugar prices have been so disappointing. They have been counting on strong ethanol offtake to counteract the pressure on the ethanol prices, which is almost inevitable with the full onset of a harvest in which there will be a strong swing away from sugar production towards ethanol production.

Complicating the supply situation further, ethanol imports boomed to almost 0.40bn litres in April, bringing imports for the first four months of 2018 to 1.0bn litres, almost 20% above the 0.84bn litres imported over the same period in 2017, despite the import tariff imposed in the middle of last year.

As Table 1 illustrates, in the second half of April, pump prices finally began to follow the ex-mill price downwards. From 70% in mid-April, the pump price ratio in São Paulo (ethanol/gasoline) declined to 65% by mid-May, a level which in past years has been sufficiently favourable to give a significant boost to hydrous ethanol consumption in São Paulo state (by far the biggest regional market for fuel) and beyond.

Meanwhile, with world (Brent) oil prices approaching USD 80/barrel and Brazil’s exchange rate weakening significantly against the US dollar over the last month, domestic gasoline prices are likely to remain firm or rise further.

Figures for fuel consumption volumes will take time to emerge (as of mid-May, official statistics are only available up until March). However, it seems fair to say that over the last few weeks things have been looking up for Brazilian ethanol. And that would be very welcome, given that the sugar market has given Brazilian millers very little reason to be cheerful in 2018.