Brazilian ethanol prices trading above raw sugar futures for the first time in almost two years are spurring speculation that millers will favor making the biofuel over the sweetener in the season starting in April.
Hydrous ethanol, used in flex fuel cars in Latin America’s largest economy, is trading at about 19 cents a pound, according to Lausanne, Switzerland-based Kingsman SA, which has provided sugar and biofuels research for more than 20 years. The price is 4.7% higher than raw sugar futures trading at 18.14 cents a pound on ICE Futures U.S. in New York today. Ethanol surpassed sugar for the first time since April 2011 on Feb. 7, said Beatriz Pupo, a Kingsman analyst.
“If ethanol prices continue rising, millers may well prefer to produce ethanol and sell it in the domestic market, which will provide them with cash quicker,” Pupo said by phone from Montreal yesterday.
The global sugar surplus that sent prices down the past two years may be eliminated within 18 months depending on the amount of cane that is used in Brazil for ethanol, Jonathan Drake, chief operating officer at RCMA Commodities Asia Ltd. and former head of sugar trading at Cargill Inc., said in an interview in Dubai on Feb. 4. Sugar futures climbed 1.8% yesterday, the biggest gain since Jan. 30.
Millers in Brazil, the world’s biggest producer of sugar, convert cane into ethanol to sell mostly on the domestic market for reais or into the sweetener, which is largely sold overseas for dollars. The strengthening local currency, which has gained 4% against the greenback this year, the most among 25 emerging-market currencies tracked by Bloomberg, also diminishes the allure of exporting sugar. Brazil’s currency had fallen 22% between June 2011 and the end of last year.
“The strengthening real is also making sugar exports less attractive in relation to ethanol as sugar is sold in dollars,” Pupa said. That would be another incentive for millers to make more ethanol, she said.
Brazil Finance Minister Guido Mantega signaled a new ceiling for the real last week, saying in an interview with Reuters that the government will curb gains in the currency should it strengthen to 1.85 per dollar. Exchange-rate policy hasn’t changed and Brazil won’t allow speculative appreciation of the currency, the Finance Ministry said in an e-mailed statement to Bloomberg on Feb. 8.