After more than a month of speculation that high oil prices would incentivize ethanol production in Brazil, it seems that market participants’ assumption may come true, according to Expana’s fundamentals team.
“The supply and demand, as well as trade flows, look very comfortable for both the short and mid-term, so sugar prices are not exactly mirroring oil every day,” said Expana’s Sugar & Ethanol Analyst, Rodrigo Bermejo. “However, we are reaching a critical point… Prices are too low, and Center-South Brazil can theoretically divert more sucrose toward ethanol.”
So, if ethanol production takes away from sugar production, the supply and demand fundamentals in the sugar market would change—prompting a higher price floor for the sweetener. Actions in the world’s top sugar producing nation of Brazil are being watched closely by the Expana crew.
“Additionally, the BRL has been strengthening against the USD, which increases ethanol’s competitiveness versus sugar to be exported,” added Bermejo.
Over the last three months, global sugar futures on NY ICE have gone through a bit of a rollercoaster ride: As of April 22, nearby contract prices finished up ~1% from the previous day to 13.57 USc/Lb, according to the Expana platform. Previously on March 24, contract prices surged to 15.88 USc/Lb.
Almost every day, news outlets have reported on the Middle East conflict as it relates to commodity markets:
“Rising energy prices are bullish for sugar, because they can encourage cane mills to produce less sugar and more ethanol, a cane-based biofuel,” according to Reuters.
Still, Expana’s fundamentals team on the ground in Brazil says the situation might not be so straightforward: While low sugar prices would logically incentivize the use of sugarcane for biofuels during a time of high energy costs, Brazilian government intervention and a large sugarcane production year may keep sugar prices around current levels, reported Expana.
Pressure at the Pump?
Despite rising energy costs around the world, Brazil’s consumer gasoline prices have remained relatively flat after an initial spike in March. Previously, Expana’s team was watching gas prices for domestic increases in Brazil, and for news out of the state-controlled energy corporation called Petrobras. However, now, the concern has been muted.
“After nearly two months of conflict, the market consensus is that Petrobras is unlikely to take any action before the conflict is resolved,” said Bermejo. “Even once it is over, any price adjustment would likely be limited, and expectations for a significant increase remain low.”
Looking Back
On March 19, Expana’s editorial team interviewed Bermejo about the convergence of elevated sugar prices and energy costs during the Middle East conflict.
“Everyone [was] trying to understand if Petrobras [would] increase [gas prices] domestically or not,” said Bermejo.
At the time, Bermejo said that sugar prices would come down unless Petrobras makes a change.
“We still have production surplus [over consumption]…” he reminded. “Conversely, if [Petrobras officials] announce a price increase, [sugar prices] should adjust higher.”
As of March 16, “Brazil’s state-controlled oil company Petrobras [was] yet to increase local gasoline prices, but… raised diesel rates,” reported Reuters.
Previously, Petrobras increased diesel prices the day after the Brazilian government zeroed gasoline taxes, according to Bermejo who noted this as the reason for unchanged prices at the pump.
Bermejo confirmed speculation that the Brazilian government—hoping to be viewed in a positive light amongst voters—is working to keep gas prices low ahead of an election year.
While Bermejo said that Brazilian ethanol production is in fact set to increase, he noted that it is largely due to more corn ethanol production, along with an abundant sugarcane harvest.
Image source: Adobe
FAQs
Why are low sugar prices linked to ethanol production in Brazil?
Brazilian cane mills decide how much sugarcane to direct toward sugar versus ethanol. When sugar prices are low and energy prices are high, the economics shift toward ethanol. That flexibility makes Brazil’s sugar and energy markets more tightly connected than almost anywhere else, a price move in one can ripple directly into the other.
Why haven’t rising oil prices pushed sugar prices higher?
The link exists, but it is not automatic. Sugar supply and demand fundamentals are currently comfortable, and a large sugarcane harvest is keeping a lid on prices despite the theoretical case for diverting more cane toward ethanol. The incentive is there. The market just has not moved decisively to act on it yet.
What role does Petrobras play?
Petrobras sets domestic gasoline prices in Brazil. If it raises them, ethanol becomes more competitive at the pump, which pulls more cane away from sugar production and tightens supply. The market has been watching for that signal for weeks. The current consensus is that Petrobras will not move until the Middle East conflict is resolved, and even then, any adjustment is expected to be limited.
Written by Ryan Gallagher
