Brazil’s Millers May Switch to Ethanol If Prices Keep Converging

Millers in Brazil, the world’s largest sugar producer, may switch to making ethanol at the expense of the sweetener if prices for both commodities continue to approach similar levels, Societe General SA said.

Domestic sugar sales in Brazil were last week 32 percent more profitable than anhydrous ethanol, the type blended into gasoline, according to Cepea, a university of Sao Paulo research group. Local sugar sales were 35 percent more advantageous last week than the hydrous kind, used in flex-fuel cars. That compares with a 40 percent advantage in the week ended March 2 for both types, the data show.

“Sugar and ethanol prices have slowly begun trending back to parity, suggesting that more cane could be diverted to ethanol production,” Michael Haigh, the New York-based global head of commodities research at the French bank, said in a report e-mailed yesterday. “If prices continue to trend towards parity, we would expect to see a greater shift and less sugar available for both consumption and global trade.”

Both sugar and ethanol are made from raw material sugar cane in the South American country. Higher prices for sugar have resulted in millers favoring production of the sweetener over the past year. A switch to ethanol could add “upside risk to sugar prices,” Haigh wrote in the report.

Raw sugar will average 24.5 cents a pound in the first quarter and 23 cents a pound in the second, before recovering to 23.9 cents a pound in the third and 24 cents a pound in the fourth, Societe Generale estimates.

source: bloomberg