Insight Focus
Drivers need to shift consumption to ethanol, to absorb the additional supply resulted from millers allocating more cane to biofuel production. If they don’t, ethanol prices will remain pressured and could drag sugar prices along…
The Only Thing Behind is Sugar
With the delay that seems to be the norm this season, UNICA disclosed only last week the crush figures for 1H and 2H of May.
Cane crushing was behind in the 2H of May, due to higher precipitation this year compared to last year. But cumulatively, the total crush is 16% ahead. This stronger cane crushing pace has compensated for the massive reduction in the sugar mix, which has come down 8 p.p yoy – the lowest since 2022/23.
It is fairly easy to explain the lower allocation to sugar, after all prices are at the bottom of the past 5 years, and even though ethanol prices have come down 15% since the start of the season, the biofuel is still more attractive than sugar is in most states (even at times in Sao Paulo).
The question is, will it remain so? Or is the ethanol price set for another drop?
This time it’s not corn…
Corn ethanol production more than doubled in 4 years, but the same cannot be said about domestic ethanol demand, which grew around 26% over the period.
Last year, what prevented a larger ethanol surplus was a 50% sugar mix. But it was a different price environment, one that had sugar paying 4c/lb more than ethanol early in the season.
This season already started with ethanol paying -1.5c/lb more than sugar, and mills shifted to ethanol production accordingly. Hydrous cane ethanol output is 44% ahead YoY, and what prevent prices from collapsing further was corn ethanol output down 15% YoY, reducing the supply glut from 1.7 to 1.5 billion litres.
Ethanol and gasoline parity came down to the lowest point of the decade. And still ethanol demand failed to react enough to absorb the additional supply. Hydrous market share needs to surpass 30% to sustain prices, and this is considering our base ethanol production scenario. Any percentage point reduction in sugar mix can add 500 million litres to the ethanol balance.
Rise to E32 is Needed…
Corn ethanol producers have prioritised anhydrous production, which is a staggering 60% above YoY. At this pace, the season could end with an additional 1 billion litres of anhydrous from corn and a potential 600 million litres from cane. While hydrous demand needs to grow to absorb the additional supply, when it does it means there is less anhydrous demand (anhydrous is blended in gasoline).
One way to absorb part of the extra production is the increase of the anhydrous blend. Currently at 30%, it is permitted to climb up to 35% by law. This year, the government is looking to increase to 32% which would create around 700 million litres demand if implemented in August.
