Brazilian ethanol production will fall in the coming season,
as pricing continues to encourage cane crushers to produce sugar instead, think
tank Cepea said.
"The ethanol market started in 2017 in a slightly
encouraging scenario, given the higher prices obtained by the mills last year,"
But the think tank said that dynamics for the sugar year, which
official starts in April, still favoured sugar production, particularly after a
shift in Brazilian tax policy.
Lower domestic fuel
Ethanol production in Brazil was down in the 2016-17 season,
as high sugar prices and competitive gasoline meant cane mills favoured sweetener
production over fuel.
Cepea said the production of hydrous ethanol, which is used
domestically in Brazil's large fleet of flex-fuelled vehicles, was likely to
fall further in 2017-18.
In part this is down to the fact that a tax-incentive
scheme, in place since 2013, as allowed to lapse at the end of 2016, leaving
hydrous ethanol even less competitive against gasoline.
But Cepea said that production of anhydrous ethanol, which is
mostly exported to be blended into gasoline, and used in conventional vehicles,
"In the 2017-18 crop year, agents should continue to
allocate a good portion of sugarcane to sugar production instead of hydrated
ethanol, given the greater profitability of the sweetener," Cepea said.
But the think tanked noted that practical factors would limit
to the extent to which mills could switch away from ethanol to sugar.
"The capacity of sugar production in the mills in 2017-18
should grow due to investments made for this purpose, but not so markedly,"
Cepea was upbeat on sugar prices in the coming season.
"Prices in the Brazilian market for sugar should continue to
rise during 2017, supported mainly by estimates of the world's coming world
"Despite the slight rebound projected in global 2016-17
production, up from 3% over the previous season, totalling 171m tonnes, the
volume should not be sufficient to meet demand, estimated at 174m tonnes
Eyes on the mix
Falling ethanol production is bad news for sugar bulls, as
the Brazilian ethanol mix is one of the key uncertainties for this year.
"It is increasingly clear
that the only major factor which causes supply to increase/decrease as prices
rise/fall, is the ethanol parity in Brazil," said broker Marex Spectron.
Marex Spectron noted a theory that "when sugar is in clear
surplus, the ethanol parity serves as a ceiling, and when sugar is in clear
deficit, the ethanol parity serves as a floor".
The broker noted that swings in the sugar mix could account
for as much as 6m tonnes of sugar added or removed from the balance sheet.