Mills in Brazil decide to produce more sugar than ethanol due to drastic fuel tax cuts

Profit from the sale of ethanol fell in relation to that of sugar, making the plants take their productive efforts away from the fuel 

Os drastic cuts in fuel taxes by President Jair Bolsonaro (PL), mainly on gasoline, should lead mills to avoid ethanol biofuel and invest heavily in sugar.

Find out the advantage of producing sugar for mills

According to sugar and ethanol specialists, profits from sales of sugarcane 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 producing sugar as the second stage of the harvest begins.

Brazilian analyst Julio Maria Borges, from JOB Economia, questioned why Brazilian mills continue to produce ethanol if they are making losses with the sale of ethanol. The risk that sugar producers around the world run is the price of the sweetener falling due to the drastic cut in ethanol production by Brazilian mills, which would increase the global supply of sugar.

Gasoline used to be taxed more than ethanol. However, as the Brazilian government temporarily canceled federal fuel taxes, ethanol's price advantage at the pump has diminished.

Brazilian sugar and ethanol producers, in order to decide on their production strategy, constantly check the so-called ethanol parity, that is, the financial return on the biofuel equivalent to the prices of raw sugar on the ECI.

Michael McDougall, managing director of New York-based brokerage Paragon Global Markets, LLC, questions what further harm can be done if the par ethanol it is already at 13,70 (cents per pound). Sugar futures on ICE closed at 18,35 cents per pound on Monday (12), which is equivalent to almost 35% above the value of ethanol in Brazil.

However, according to Claudiu Covrig, from Covrig Analytics, there are momentary limitations for transferring a lot of production to sugar due to the peak period of the harvest. Mills need to use part of their ethanol facilities to handle today's high volumes of cane crushing. The switch to sugar, according to Covrig, will occur gradually as crushing volumes become smaller over the last few months of the season.

According to data from the Unica industrial group, the highest allocation of cane to sugar was 49,7% in 2006, and the lowest, 34,3% in 2019. By mid-August, the sugar mix was at 44,7 .XNUMX%.

How is the price of ethanol in the Brazilian states?

Ethanol, according to a survey by the National Petroleum, Natural Gas and Biofuels Agency (ANP) compiled by AE-Taxas, is more competitive in relation to gasoline in just three states: Goiás, Mato Grosso and São Paulo.

Mato Grosso has the best cost/benefit ratio in the country for ethanol (61,42%), unlike Amapá, which is the state where it is least worth it (113,35%). In São Paulo the parity is at 68,30%.

According to the ANP, the average price of ethanol dropped 4,85% last week compared to the previous week, with a fall of R$ 0,18 in just seven days (from R$ 3,71 to R$ 3,53 a liter). In one month, ethanol has already accumulated a drop of 14,53%.

São Paulo, the main producer and consumer and the state with the most gas stations evaluated by the agency, the average price dropped 27,86% in the week, to R$ 3,34, being the biggest percentage drop in the country. On the contrary, Sergipe was the state with the biggest increase in prices (28,1%), which made the average price of ethanol soar by R$ 0,99 in just seven days, from R$ 3,51 to R$ 4,50, XNUMX a litre.

The lowest price per liter of ethanol found by the ANP was at a gas station in São Paulo (R$2,74), while the highest was in Rio Grande do Sul (R$6,99). The lowest state average price is currently that of Mato Grosso (R$ 3,12), and the highest, that of Amapá (R$ 5,35).

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