New York — A sharp fuel price hike effective on Friday in Brazil could drive a sizeable reduction in the amount of sugar the country -the world’s largest supplier – will ship abroad during the new crop season that starts in April, according to experts.
They said that the move by Brazil’s oil company Petrobras to increase gasoline prices by nearly 19%, tracking oil’s price surge amid war in Ukraine, will yank ethanol prices higher. In turn, that will drive Brazilian mills to produce more of the biofuel at the expense of sugar.
Brazilian sugar and ethanol companies have industrial flexibility to produce more or less sugar or ethanol depending on market prices. If ethanol prices jump, they divert more sugarcane to make more of the biofuel, and less sugar.
Sugar industry analyst Claudiu Covrig says that if ethanol prices rise by a level similar to Brazil’s gasoline hike, the selling price of ethanol would surpass that of sugar for the first time in years.
He said that even if mills increase ethanol prices by less than the 19% gasoline price increase – 15% for example – in a move to boost market share, they would still make more money selling the biofuel than exporting sugar.
In that scenario, Covrig estimates Brazil could cut sugar production by around 1.2 million tonnes in the 2022/23 crop (April-March).
That amount could be bigger.
“A rough guess is they (the mills) might be able to shift (displace) 2.5 million tonnes of sugar, if the price difference remains attractive (towards ethanol),” said Michael McDougall, managing director at Paragon Global Markets in New York.
He said that mills could even ‘wash out’, or cancel, sugar export contracts with commodities traders, at a fee, if the price difference is favourable enough, further reducing the amount of sugar that would be produced.
Julio Maria Borges, an advisor to Brazilian mills, says that the latter’s choice to produce sugar or ethanol will continue to vary as the crop progresses and energy prices evolve.
- Reuters (Reporting by Marcelo Teixeira; Editing by Kenneth Maxwell)
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