Brazil May Force Sugar Cane Companies to Stockpile Ethanol, Analyst Says

Brazil’s fuel regulator may require sugar-cane processors such as Cosan SA Industria e Comercio (CSAN3) and Sao Martinho SA (SMTO3) to store ethanol in an effort to prevent future rate shocks, an analyst said.

Agencia Nacional do Petroleo, Gas Natural e Biocombustiveis is considering policies that may prevent a repeat of the seasonal shortfall that has triggered record-high ethanol prices this year, according to Jacqueline Bierhals, a manager at the Sao Paulo-based research agency Informa Economics FNP.

Requiring cane producers to stockpile ethanol would be a move away from an existing incentive program that offer them access to credit lines for every liter of stockpiled fuel, a policy that has become less appealing as prices have surged this year, she said.

Companies “lose interest” in the credit line when the rising price of ethanol makes it more profitable to sell than store, Bierhals said in an e-mail yesterday. If the regulator imposes a storage requirement, it will also likely take on responsibility for managing the reserves, she said.

Prices for anhydrous ethanol that’s mixed with gasoline have climbed 74 percent since Dec. 30, when sugar-cane mills began to close down for the annual inter-harvest season, according to the research company Centro de Estudos Avancados em Economia Aplicada, known as Cepea. Cane producers in Brazil refine the plant into fuel and sugar and typically close their mills in the country’s south from January to April for the rainy season.
Credit Line

The credit line offers producers access to a credit worth 0.56 reais (35 cents) for every liter of anhydrous ethanol stored.

That figure is calculated at about two-thirds of the value of the fuel, assuming ethanol costs 0.83 reis a liter, according to Brazil’s national development bank Banco Nacional de Desenvolvimento Economico e Social, which is one of two state- run banks that offers the line.

Those incentives made more sense last year, when average weekly ethanol prices during the 2010 inter-harvest season peaked at 0.73 reais, according to Cepea.

Average prices for ethanol rose 6.8 percent to 2.13 reais a liter for the week ended April 8 from the prior week, a record high, Cepea said on its website.

Another option is requiring mills to tell the fuel regulator how much ethanol they expect to produce, according to Alisio Vaz, president of Sindicato Nacional das Empresas Distribuidoras de Combustiveis e de Lubrificantes, a Rio de Janeiro-based fuel distributor association.

“If the government believes there’s a danger that supply won’t meet demand, it may take measures to stimulate production like opening credit lines,” for mills, he said.
‘More Investment’ Needed

The measures being considered may not curb the current run- up in ethanol prices, according to Josias Messias, director of the Ribeirao Preto, Sao Paulo-based consulting company Procana. “What’s needed is more investment” in mills to boost production capacity and match increasing demand, he said.

A spokeswoman for the Brazilian fuel regulator confirmed that the government is evaluating ways to increase its control over Brazil’s ethanol industry.

source: bloomberg