Falling fuel prices, weak currency drive Brazil switch from ethanol to sugar

NEW YORK, March 23 (Reuters) - Brazilian mills are expected to make a sharp switch from ethanol to sugar production in the new season kicking off in the world’s largest sugarcane producer, as falling gasoline prices and a weak currency reduce the biofuel’s appeal, analysts said.

Mills in Brazil have the flexibility to partially switch cane toward sugar or ethanol production, depending on market prices. For the last two years, they have allocated an all-time low amount of cane for sugar, around 34%, as ethanol gave them higher returns.

The situation is shifting sharply. The coronavirus pandemic has destroyed demand for road fuels worldwide, cutting overall prices, and this negative outlook for ethanol has caused mills to shift their strategies, according to consultants.

Gasoline prices are down 20% at refineries in the country, pressuring profit margins for ethanol in Brazil, where both fuels compete at the pumps. Unlike some other countries, where ethanol is merely mixed into the gasoline supply, most Brazilian cars can run entirely on ethanol.

Last year, ethanol accounted for almost 40% of the fuel used by light vehicles, with production near 34 billion liters.

The record low level for Brazil’s real currency adds to the equation by boosting earnings in dollar-denominated sugar exports, which are expected to jump.

“We are looking at 46% cane allocation for sugar in the new season, with mills adding around 10 million tonnes of sugar to the export market,” said Julio Maria Borges, a former executive at Copersucar, the world’s largest sugar co-op, and an adviser to sugar and ethanol companies in Brazil.

Brazil exported only 19 million tonnes of sugar in the previous season, the smallest volume in years. Borges sees exports jumping to around 29 million or 30 million tonnes in the new crop, which could pressure raw sugar prices.

Brazil’s Safras & Mercado consultancy updated their sugar-mix estimate in March to 46% from 44% in December and 34% in the previous season. It sees sugar production growing to 33.5 million tonnes from 29 million tonnes.

“If Brazil enters recession and we have lower ethanol consumption, we could see a much higher sugar mix,” said Claudiu Covrig, a sugar and ethanol analyst with commodities analysts S&P Global Platts.

Every 1% increase in the sugar mix would mean about 800,000 tonnes more sugar, he said.

But there is a limit for changes in the mix, as mills need to use all their industrial capacity, with both sugar and ethanol installations running, to be able to crush all the expected 600 million tonnes of cane in time.

Evandro Gussi, who heads Brazil’s sugar and ethanol industry group UNICA, said the prospect for a price war in the Brazilian fuel market, including possible cheap imports of gasoline, is worrisome.

He said the group is talking to the government to evaluate measures such as tax collection deferrals for ethanol producers to help them stay profitable in coming months.

“We can not turn all the cane into sugar; mills will continue to produce ethanol, and measures are needed,” he said. (Reporting by Marcelo Teixeira; Additional reporting by Roberto Samora in Sao Paulo; Editing by Jonathan Oatis)