BRAZIL: Ethanol is more profitable than sugar for mills far from the port

Published: 05/09/2017, 3:30:58 PM

Hydrous ethanol is starting to offer higher profits than sugar for Brazilian mills located in states far from Santos port, the main port for sugar exports in the country, reports Valor Econômico news website.

According to a survey by FCStone, it is already more advantageous for mills in Mato Grosso, Goiás and Mato Grosso do Sul states to produce ethanol  instead of sugar. In these states, the price of hydrous ethanol is above the price of the most traded demerara contract in New York.

In Goiás, hydrous ethanol is worth the equivalent of US$0.158 per pound; in Mato Grosso do Sul, it is worth US$0.156 per pound; and in Mato Grosso, at US$0.174 cents a pound, according to data from last week.

The difference in price is greater in states farthest from the coast because the calculation considers freight cost, which increases according to the distance from the port, explains Ricardo Nogueira, consultant at FCStone.

In addition, while the cost of sugar freight is paid by mill, freight for ethanol is the responsibility of the distributor, he adds.

This turnaround in the market occurs precisely in states where there were more changes in sugar production in 2016: either because of distilleries that installed sugar factories, or mills that bought new machines and moved their structures to increase sugar production capacity.

Even in states where the price of hydrous ethanol is still below sugar, production of the biofuel might be more advantageous. The sale of ethanol provides more liquidity because payment to the mill occurs as soon as the product is put on the distributor's trucks.

One of the mills that invested in a sugar factory in 2016 was Bioenergética Aroreira, with a mill in the mining municipality of Tupaciguara, which now has the capacity to produce 120,000 tonnes of sugar per crop. According to José Rubens Bevillaqua, director of the company, the unit will not change the percentage of sugar production in relation to ethanol, which is planned at 80% for this harvest, because a good part of its production has already been priced. “For the next year, we may have to review this,” he said.

When Aroeira made the investment decision to build a new sugar factory, sugar was priced above US$0.205 cents in the international market, and the dollar was around BRL3.40. Currently both the commodity price and the exchange rate are less favorable to exporters.

Nogueira, from FCStone, recalls that about 60% of the sugar production which will be exported this year has been priced, which means that 40% is yet to be negotiated.

As sugar expands its losses, ethanol prices have not been dropping in the same pace in recent weeks. At the end of April, the Cepea/Esalq index for hydrous ethanol in São Paulo rose 0.9% in four weeks, while contracts for sugar fell 7.4% in New York.

Ethanol prices are even higher than a year ago. The Cepea/Esalq index for prices in São Paulo in the last week of April was 11% above the price at the same period last year.