Brazil May Need More of Your Ethanol

Brazil's ethanol blend rate may increase from 20 to 25%

Rains are slowing up the harvest of the earliest beans in much of Mato Grosso, after the season's first beans were brought in. Rust outbreaks are increasing, and one Mato Grosso ag leader said state yields are going to drop a bit as a result. More rain was in the forecast for this week.

Despite such concerns, 2012-13 soybean crop size estimates keep climbing, with one consultancy putting this season's Brazilian bean production as high as 84 million tonnes. It's early yet, but one Mato Grosso producer said the first of his bean harvest came in at 49 bushels per acre.

Brazil gasoline, diesel price to rise

Even though Brazil's gasoline prices are the highest in all of Latin America (the blend of gasoline and 20% ethanol at a nearby station here is $5.54 per gallon right now; diesel is a relative bargain at $4.01), the government here indirectly subsidizes fuel costs to keep inflation under control. It does so by not allowing Petrobras, the state oil company, to charge market rates for wholesale gasoline.

Taking an estimated 15% hit on its sales to distributors means Petrobras is swallowing billions a year in losses. And such underselling gets old pretty quick. So Petrobras has been at the forefront of the push to bump the national ethanol blend back up to 25% from the 20% level it was dropped to back in 2011, when sugarcane production dropped and ethanol got more expensive.

And they want it done by June.

Since gasoline is one of the products tracked by the government to measure inflation, the administration here is eager to keep prices from rising -- especially at a time when huge numbers of Brazilians are moving into the middle class and buying cars. The government has rigid inflation control targets. So the rumors that gas prices will jump 70%, and diesel by four or five percent, are scary as the economy here finally begins to feel some of the effects of the world economic slowdown.

Upping the price of wholesale gasoline and restoring the blend to 25% have a sort of Push Me-Pull You effect at the consumer level, where flex fuel cars and neat ethanol pumps at every service station mean consumers blend their own gasohol in response to today's prices. My friend with the degree in economics would say that choice between two commodities, based almost purely on price, is a highly elastic situation. That is, consumers would react immediately to the drop of a penny or to a nickel's increase.

If ethanol prices don't climb at the same time, Brazilians will buy that much more of the stuff as soon as gasoline goes up.

What it means to you

If that happens, the question remains: can Brazil supply a five-percent increase in the ethanol blend? Years of tight money in the sugarcane sector have meant declining yields, as producers let those fields go another year or two—or three. After all, sugar yields usually decline to a point below maximum returns on fields that have been producing more than five years.

The Brazilians have been replanting older sugarcane fields, and as much as 10% of fields in the main production region of the country are to be replanted in 2013-14. Meanwhile, world sugar prices have dropped, giving crushers an incentive to make a tad more ethanol and a bit less sugar from each ton brought in.

Even so, Brazil has become our top export destination for corn ethanol in recent years, and, with a higher blend, the Brazilians may just be buying more—in the short term, at least.

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