NEW YORK/SAO PAULO (Reuters) - U.S. ethanol plants and traders are rushing to sell biofuel to Brazil as tightening supplies and logistics in the South American market give the world’s top producer a rare opportunity to ship south during the peak sugar cane harvest, sources said. U.S. ethanol plants are pumping out a record 1 million barrels per day taking advantage of cheap and plentiful corn feedstock, pushing domestic prices to three-month lows. But they are finding unexpected demand in rival Brazil, where production is falling short of expectations as skyrocketing sugar prices have spurred mills to crush more cane into sweetener rather than make ethanol.
That has opened an arbitrage window at an unusual time of the year, highlighting the diverging market conditions between the world’s two top ethanol producing nations.
“U.S. corn prices are cheap and the dollar has weakened creating a window of opportunity for ethanol shipments to Brazil’s Northeast,” said Tarcilo Rodrigues, the lead ethanol specialist at Bio Agencia brokerage and consultants.
Rodrigues said mills in the main center-south cane region, which is in the peak of harvesting, typically ship ethanol to the northeast, which is unable to produce sufficient biofuel for demand in the region.
But tank capacity at the main southern ports is currently occupied by diesel imports by the state-run oil company Petrobras, blocking intercoastal shipments of ethanol, he said.
Brazil’s northeast cane crushing season is still some weeks off from ramping up its own ethanol mills, which accounts for only 10 percent of Brazil’s cane output, as the region winds down its interharvest period leaving biofuel supplies tight. Raizen, the world’s largest sugar and ethanol producer, has booked 55 million liters (14.5 million gallons) of biofuel from U.S. origin to Brazil to set sail in late July-early August, according to three U.S. traders. That amount alone is the highest for any July-August period since 2012, according to U.S. Department of Agriculture data. Despite recent reductions in forecasts for ethanol production in Brazil due to soaring sugar prices, imports of the biofuel into the main center-south market are unlikely as most of the demand has already been met by mills in the region.
But the North/Northeast region, with a 3 billion-liter (790 million-gallon) annual demand, will only produce around 1 billion liters. BioAgencia is forecasting imports of U.S. ethanol to meet 500 million liters of that unmet demand. The rest should come from the center-south.
Raizen declined to comment when contacted by Reuters. The Furuholmen and Ardmore Chinook ships are waiting to unload ethanol for Raizen in the northeastern port of Itaqui, in Maranhao, according to the port’s Web site and shipping agents there. Analysts expect regular shipments from the U.S. Gulf to Brazil’s Northeast to continue through early 2017.
For the beleaguered U.S. ethanol industry, the exports to Brazil have helped boost profits. Margins are at their highest since late 2014. Returns over operating costs are averaging 37 cents per gallon this month, Iowa State University data show. In January, average margins were negative, leaving U.S. producers like Pacific Ethanol Inc with hefty losses.
“Several years ago if you had suggested to a room full of ethanol producers, ‘we’re going to have $45 crude oil and you guys are going to still make money,’ you would have found some doubters,” said Geoff Cooper, Senior Vice President at the Renewable Fuels Association. “These are decent margins.” Ethanol futures in Chicago are trading around $1.41 per gallon, the lowest since March, and cash prices too have fallen, stirring demand from foreign buyers.
Meanwhile, sugar prices fresh off three year highs are compelling Brazilian mills to favor production of the sweetener over ethanol, and dry weather since March has unexpectedly shrunk the size of Brazil’s cane crop.
Cane analyst Datagro shaved 3 percent off its May forecast for Brazil’s center-south ethanol output to 28 billion liters due to firm sugar prices and the shrinking cane crop, which it slashed by 4 percent to a forecast of 597 million tonnes.
Brazil sugar exports from January through July are flowing gangbusters through the ports. Raw sugar shipments reached a record 12.72 million tonnes over the first seven months, up 30 percent from last year and up 18 percent from the previous record for the period in 2010, Trade Ministry data showed.
“With sugar exports moving as fast as they are, we are going to have a complicated interharvest period ahead (January-March) finding ethanol for the domestic market,” lead sugar analyst at Archer Consulting, Arnoldo Correa said.
Reporting by Reese Ewing; Editing by Marguerita Choy