President Jair Bolsonaro’s decision to drastically cut taxes on fuels, particularly gasoline, to boost his chances of re-election has squeezed ethanol profit margins and is likely to lead mills to shun biofuel and focus heavily on sugar.
Sugar and ethanol experts say profits from sales of cane ethanol have dropped so much compared to sugar that Brazilian mills, which have the flexibility to produce more of one or the other, will shift as much as possible to sugar production. as the crop enters the second stage.
“The mills are already making a loss from the sale of ethanol, why would they continue to produce it?” said analyst Julio Maria Borges from JOB Economia.
The risk for sugar producers around the world is that sweetener prices could decline if Brazilian mills drastically cut ethanol production, increasing global sugar supply.
The Brazilian government has temporarily canceled federal taxes on fuel. As gasoline used to be taxed more than ethanol, the elimination of taxes diminished the price advantage of ethanol at the pumps.
Brazilian sugar and ethanol producers constantly check the so-called ethanol parity, or the financial return of biofuel equivalent to raw sugar prices on ICE, to decide the production strategy.
“Ethanol parity is already at 13.70 (cents per pound), what further damage can be done?” said Michael McDougall, managing director of New York-based brokerage Paragon Global Markets, LLC.
By way of comparison, sugar futures on ICE closed at 18.35 cents per pound on Monday (12), almost 35% above the value of ethanol in Brazil.
There are, however, momentary limitations to shifting much production to sugar due to the peak harvest period, said Claudiu Covrig of CovrigAnalytics.
To deal with the high volumes of sugarcane crushing currently, mills still need to use part of their ethanol facilities.
Covrig believes the switch to sugar will happen gradually as crushing volumes become smaller heading into the final months of the season.
According to data from the industrial group Unica, the largest destination of cane for sugar was 49.7% in 2006, and the smallest, 34.3% in 2019. In mid-August, the sugar mix was at 44.7% .
A poll published on Friday (19) showed that Bolsonaro would likely lose a runoff against left-wing opponent Luiz Inácio Lula da Silva in the October elections.
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