February 12th, 2013

Brazilian ethanol prices trading above raw sugar futures for the first time in almost two years are spurring speculation that millers will favor making the biofuel over the sweetener in the season starting in April.

Hydrous ethanol, used in flex fuel cars in Latin America’s largest economy, is trading at about 19 cents a pound, according to Lausanne, Switzerland-based Kingsman SA, which has provided sugar and biofuels research for more than 20 years. The price is 4.7 percent higher than raw sugar futures trading at 18.14 cents a pound on ICE Futures U.S. in New York today. Ethanol surpassed sugar for the first time since April 2011 on Feb. 7, said Beatriz Pupo, a Kingsman analyst.

“If ethanol prices continue rising, millers may well prefer to produce ethanol and sell it in the domestic market, which will provide them with cash quicker,” Pupo said by phone from Montreal yesterday.

The global sugar surplus that sent prices down the past two years may be eliminated within 18 months depending on the amount of cane that is used in Brazil for ethanol, Jonathan Drake, chief operating officer at RCMA Commodities Asia Ltd. and former head of sugar trading at Cargill Inc., said in an interview in Dubai on Feb. 4. Sugar futures climbed 1.8 percent yesterday, the biggest gain since Jan. 30.

Currency Gains

Millers in Brazil, the world’s biggest producer of sugar, convert cane into ethanol to sell mostly on the domestic market for reais or into the sweetener, which is largely sold overseas for dollars. The strengthening local currency, which has gained 4 percent against the greenback this year, the most among 25 emerging-market currencies tracked by Bloomberg, also diminishes the allure of exporting sugar. Brazil’s currency had fallen 22 percent between June 2011 and the end of last year.

“The strengthening real is also making sugar exports less attractive in relation to ethanol as sugar is sold in dollars,” Pupa said. That would be another incentive for millers to make more ethanol, she said.

Brazil Finance Minister Guido Mantega signaled a new ceiling for the real last week, saying in an interview with Reuters that the government will curb gains in the currency should it strengthen to 1.85 per dollar. Exchange-rate policy hasn’t changed and Brazil won’t allow speculative appreciation of the currency, the Finance Ministry said in an e-mailed statement to Bloomberg on Feb. 8.

Carnival Holiday

The real strengthened beyond 2 per dollar for the first time since July last month as Brazil exempted foreigners from a tax on real-estate funds traded on the stock exchange, encouraging speculation that inflows would sustain the currency. Trading in the real, which closed last week at 1.9727 per dollar, resumes tomorrow after the two-day Carnival holiday.

Should sugar prices remain below ethanol, millers in Brazil’s center south, the country’s main growing region, may direct 44 percent to 45 percent of their cane crop in the 2013- 14 season to making sugar, London-based futures and options broker Marex Spectron Group said in a report e-mailed yesterday. That’s down from 49.6 percent in the current season, data from Sao Paulo-based industry group Utica showed.

“If prices remain below the parity during the peak of the center south Brazil harvest period (say June to September), then the mix could fall to about 44 percent to 45 percent and thus ‘lose’ some 4 million tons of sugar production,” Paul Bannister, the head of sugar brokerage at Marex Spectron, wrote in the report.

Ethanol Tax

Sugar may need to climb to 19.75 cents a pound to make it attractive enough for millers to favor the sweetener over ethanol should the government eliminate taxes on the biofuel, Marex Spectron estimates. Brazil is planning to reduce taxes on ethanol to stimulate domestic production and consumption of the biofuel, Trade and Development Minister Fernando Pimentel said in an interview with Valor Economic newspaper last week.

“If there was to be a change in the taxes then, definitely, there is a substantial change in the outlook for sugar,” Tom McNeill, a director at Brisbane, Australia-based researcher Green Pool Commodity Specialists Pty., said by phone.

Sugar is down 7 percent this year after falling 39 percent in 2011 and 2012 as supplies are set to outpace demand by 11.5 million tons in the 12 months starting Oct. 1, Kingsman estimates. The Standard & Poor’s GSCI gauge of 24 commodities has climbed 5.1 percent this year and the S&P index of 500 stocks is up 6.4 percent.

Less Sugar

Denatured fuel ethanol futures in Chicago, where corn is the chief feedstock, climbed 7.7 percent this year. Crude oil gained 6.1 percent in New York.

Brazil’s center south sugar production may total 4 million tons to 7 million tons less than currently forecast should millers switch more production to ethanol, according to Green Pool. Sugar output in the region will be 36 million tons, according to a Feb. 4 estimate from Copersucar SA.

A 20 percent increase in Brazil’s ethanol consumption would eliminate the sugar surplus, Ben Pearcy, chief development officer and managing director of sugar and bioenergy at White Plains, New York-based Bunge Ltd., said in an interview in London on Nov. 28.

- Isis Almeida in London at Bloomberg.