Cloudy skies for Brazil sugar and ethanol as country heads back to polls

A combine harvester cuts sugar cane in a field at the Sao Martinho sugar mill in Pradopolis
A combine harvester cuts sugar cane in a field at the Sao Martinho sugar mill in Pradopolis, Brazil September 13, 2018. REUTERS/Paulo Whitaker/File Photo

NEW YORK, Oct 13 (Reuters) - Brazilian sugar and ethanol makers will likely face a less favorable business environment regardless of who emerges victorious from the hotly-contested Brazilian presidential election on Oct. 30, analysts and experts say.

Citizens go to the polls in less than three weeks for a run-off between incumbent right-wing President Jair Bolsonaro and his opponent, the leftist, former President Luiz Inacio Lula da Silva.

"It is bad with Bolsonaro, could be worse with Lula," said sugar and ethanol analyst Arnaldo Correa, a director at Archer Consulting.

The ethanol and sugar industry had a strong recovery from the pandemic as both prices for sugar and ethanol rose to near-record levels. But both candidates support policies that the industry believes could hurt demand, as they seek to lower costs for consumers.

Bolsonaro scrapped federal taxes on energy and led states to cut other taxes on fuels in a gambit to boost his chances of being reelected. Since taxes were heavier on fossil fuels, ethanol lost its price edge over gasoline at pumps. Most Brazilian cars can switch between sugar-based ethanol and conventional gasoline.

Bolsonaro has also said he has no plans to reinstate the taxes next year if reelected, so mills would be expected to shun ethanol and produce more sugar, which could depress global prices for the sweetener.

Lula, if he wins, has promised to change fuel pricing policy at state-controlled Petrobras (PETR4.SA) to bring gasoline prices down, which could be even worse for the mills because it would further squeeze margins on ethanol.

In the first round of the election on October 2, Lula received 48% of the vote while Bolsonaro garnered 43%. Since no candidate received a majority, the two go to a runoff.

Lula's Workers Party latest run at the helm with former President Dilma Rousseff from 2011 to 2016 brought havoc in the sugar and ethanol sector, as the government kept gasoline prices artificially low to stem inflation. Profit margins for ethanol fell, along with global sugar prices.

Dozens of mills went bankrupt, and several have only recently recovered.

"Mills sold ethanol below production cost 60% of the time during that period," said Correa, adding that the industry took on more debt as a result.

Bolsonaro, meanwhile, in July intervened in the country's first carbon market in ways that have been detrimental, said Soren Jensen, a former Copersucar executive and an expert in renewable fuels.

That market, known as Renovabio, was designed to boost renewable fuels by allowing mills to sell carbon credits (CBios) generated by the use of biofuels instead of oil-based fuels. Fuel distributors were obliged to buy those credits to offset fossil fuels' emissions.

Bolsonaro's administration decided to postpone Renovabio's compliance targets in yet another move to cut fuel prices, causing prices for those credits to collapse. "It was the beginning of the end for the program," Jensen said.

Equity research teams at Citi and investment bank BTG Pactual said all those factors increased risks for the financial performance of sugar and ethanol companies.

Reporting by Marcelo Teixeira; editing by Diane Craft

Our Standards: The Thomson Reuters Trust Principles.

Thomson Reuters

Covers agricultural commodities and biofuels, including production, trade and transportation, based in New York. Former Brazil correspondent and climate/environment reporter. Brazilian, holds a Bachelor of Journalism degree and has done post-graduate studies in Environmental Reporting from Germany's InWent Institute and Foreign Policy and International Political Economy from Harvard University. Avid soccer and tennis player.