Apr 21, 2020

Brazilian Sugar/Ethanol Sector in "Survival Mode"

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

Ethanol producers in Brazil are facing the same problems as ethanol producers in the United States - reduced demand and low prices. The reduced demand is due to the coronavirus keeping many people at home and the lower prices is due in part to the lower oil prices resulting from the conflict between Russia and Saudi Arabia. The end result is that ethanol producers in Brazil are "taking their foot off the accelerator" when it comes to ethanol production.

According to the Union of Sugarcane Industries (Unica), ethanol sales in south-central Brazil fell 20% during the second half of March. Mill operators in the state of Sao Paulo are expecting to sell only 30% to 40% of their normal volume in April and maybe 60% of their normal volume in May. As a result, most sugar/ethanol operators in Brazil are currently in "survival mode."

The sugar sector in Brazil has been in trouble for a long time even before the current crisis.

The problems really started years ago when the Brazilian government subsidized the price of gasoline from 2012 to 2016 in order to keep prices low and to hold down inflation. The problem was low prices for gasoline also meant low prices for ethanol. During that period or shortly after, more than 80 sugar/ethanol mills went into bankruptcy protection. Some emerged, most closed their doors.

Now with this new crisis, the Brazilian bank Itau Unibanco estimates that 30% of the sugar/ethanol operators in Brazil are in financial difficulties and they run the risk of having to close their doors as well.

There is never a good time for a crisis, but this crisis is coming at a very inopportune time for sugar/ethanol producers. The sugarcane harvest is just now ramping up and some producers have already indicated that they will slow down their early harvest so as not too overproduce ethanol. If the harvest is slowed too much, they run the risk of leaving some of the sugarcane remaining in the field at the end of the harvest, but that might be a better option than selling the ethanol at a loss.

Operators who have the option are also switching to more sugar production instead of ethanol. For operators who can access capital, they are constructing more storage facilities for ethanol so it can be sold at a later time when hopefully prices have recovered.

As of March 31st, there were 87 mills up and running in Brazil with 76 processing sugarcane, 8 were "flex" facilities that could use either sugarcane or corn, and 3 were only processing corn to make ethanol. By mid-April that number was expected to be 157. During the 2019/20 harvest season there were 267 sugar/ethanol mills operating in south-central Brazil.

During the 2019/20 harvest season (April 1, 2019 to March 31, 2020), 34% of the sugarcane was used to produce sugar, which was the lowest in 22 years and ethanol production was at record high levels. The problem now is that the price of ethanol in the state of Sao Paulo fell 35% in a little more than one month.

Brazil is in a different situation compared to the United States when it comes to ethanol consumption. Almost all of the cars in Brazil can use pure ethanol (E100) or gasoline that has ethanol blended in (E27) and every gasoline station in Brazil sells E100. Therefore, when gasoline prices plummet such as they have done in recent months, Brazilian consumers can choose gasoline (E27) when they fill up.

Ethanol producers are asking for emergency assistance to keep ethanol competitive and to invest in extra storage capacity for ethanol to give the sector some breathing room. If that assistance is not forthcoming, the impact on the sugar/ethanol sector will be severe.