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Rabobank Report: The Brazilian Ethanol Connection

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A new Rabobank report expects cane production in Brazil’s Centre/South region to rebound strongly in the forthcoming 2013/14 harvest.

This would result in increased production of both sugar and ethanol, impacting the world sugar market, given Brazil’s status as the world’s pre-eminent sugar exporter.

The outlook for Brazilian sugar production requires a view on ethanol supply, demand and prices. Rabobank expects that local ethanol prices in Brazil in 2013/14 should on average remain firm, averaging BRL 1.27 per litre (basis ex-mill, net of taxes) over the season, equivalent to the New York raw sugar price of close to USc 19 per lb. Given the typical seasonality of ethanol supply and demand, prices could go down as low as USc 17 per lb in raw sugar terms during May – July 2013.

Rabobank analyst Andy Duff explains that most mills in Brazil produce both sugar and ethanol unlike other cane producing countries. This means that millers here can vary the output of sugar versus ethanol in response to price expectations. For example, if the margin on ethanol production is expected to be higher than the margin on sugar production, they could increase the percentage of cane milled for ethanol, thus increasing ethanol production at the expense of sugar output. This means that the outlook for ethanol prices in Brazil has the potential to impact Brazil’s sugar production, and anything that influences Brazil’s sugar production in turn, impacts the outlook for world sugar prices.

Highlights of the Rabobank report:

  • Brazil is forecast to have a bumper cane crop this year
  • Global sugar supply is already abundant
  • 6.6% increase in Brazilian ex-refinery gasoline prices could send world sugar prices crashing
  • High world sugar prices in 2010 and 2011, and dramatic increase in world sugar production have created a global surplus
  • Increase in Brazilian cane production from 532 million tonnes in 2012/13 to 580 million tonnes in 2013/14
Rabobank suggests that the arbitrage between sugar and ethanol in Brazil might create a layer of resistance to further downward pressure on world sugar prices. This arbitrage would involve an increase in ethanol production, putting downward pressure on ethanol prices, and reducing Brazilian sugar production and export availability to help support sugar prices.

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