U.S. corn problems boost Brazil ethanol outlook, might affect sugar

SAO PAULO (Reuters) - Brazilian sugar mills are closely watching the 2019 U.S. corn crop for reduced harvests that could boost prices for the cereal, raising ethanol production costs there and opening room for Brazilian ethanol to gain domestic market share.

FILE PHOTO: Corn is dumped into a grain cart from a combine during a harvest near Dixon, Nebraska, U.S., October 26, 2017. REUTERS/Lucas Jackson/File Photo

In that scenario, ethanol demand in Brazil would likely rise further, experts say, leading mills to maintain current production mix that heavily favors ethanol at the expense of sugar.

Brazilian mills last season allocated an all-time low of 35% of sugarcane to sugar production, reacting to lower prices. A repeat would erase the global sugar surplus of the last two years.

Corn prices have jumped more than 25% in Chicago since May because of rains that delayed corn planting and threatened production. Ethanol prices have risen more than 20%.

Pedro Mizutani, vice president for strategy at Raízen, Brazil’s largest sugar and ethanol company, says that if production costs rise too much for U.S. ethanol makers they could lose market share in Brazil’s Northeast region, a traditional target market for U.S. exports.

“In that case, ethanol produced in Brazil’s center-south could be shipped from Sao Paulo along the coast to the Northeast,” Mizutani told Reuters in the sidelines of the Ethanol Summit, organized by cane industry group Unica.

Raízen is a 50-50 joint venture of Brazil’s Cosan SA and Royal Dutch Shell Plc, and actively trades ethanol between Brazil and the United States.

“Higher prices for corn ethanol in the international market will open room for cane ethanol to gain sales,” said Arnaldo Correa, a sugar and ethanol analyst from Archer Consulting, adding that such a move would also increase ethanol prices in Brazil.

“If that happens, it will mean less sugar available to the market”, he said, as mills would push production mix to the limit in favor of ethanol.

Martinho Ono, a director at SCA Trading, one of Brazil’s largest ethanol traders, says that if ethanol in the Brazilian market rises to 2.50 reais ($0.6461) per liter at the mill, as he expects, sugar would have to be priced above 15 cents per pound to compete with the fuel for mills’ preference. Raw sugar on Monday settled on ICE at 12.66 cents per pound.

“It is all shaping up to be a very positive outlook for Brazilian sugar and ethanol mills,” he said. “If they reduce sugar production again, prices will rise ahead”.

Reporting by Marcelo Teixeira