The Ethanol Market: Current scenario and future prospects

The ethanol market faces major fluctuations and instability. How can you protect your business and manage its risks?

December 19, 2022

hEDGEpoint Global Markets

Those that have followed the fuel market in recent years know that there’ve been many ups and downs for both producers and consumers.

The oscillation in Brazilian gasoline prices during 2022, which reached 8 BRL per liter in some parts of the country, together with the rise in diesel, made consumers wonder once again about the alternative to these fuels.

Note that the fossil fuel burst also affected the cost of production, as it is used throughout the supply chain, especially in transportation. Its effects, therefore, were also felt on the consumer price index, making the discussion about its possible alternatives even more relevant.

Although ethanol prices also suffer from high volatility, it has been increasingly valued as a clean and less polluting source of energy, in times when ESG requirements are on the rise.

There are other points impacting the ethanol market, such as the increasing popularity of electric cars, green hydrogen, investment in other raw materials to manufacture biofuel—not to mention of course, political and economic influences—always reasons to pay attention.

Faced with this scenario, it’s difficult to clearly visualize prospects. Yet our specialists address some possible paths for ethanol, all based on the current market data and trends.

The electric car and ethanol

Ethanol emerged as a fuel in Brazil in the 1980s with the Pro-Alcool Program, specifically as an alternative to fossil fuels, since the country was dependent on the international market for oil. During the great crisis that occurred in 1979, it became infeasible to continue with such high rates for imports.

This is how the 100%-alcohol-powered car appeared in Brazil, modifying the entire automobile industry and supporting sugarcane production in the country.

Soon after, anhydrous ethanol began to be blended with gasoline, at rates that varied over the years. In 2003, flex-fuel cars were launched in the market—they could run on any ratio of gasoline and hydrous ethanol. The innovation was a big success, and in 2009, it already accounted for 92% of all new vehicles sold in the country.

The recent arrival of the electric car, and the increased adherence to this technology, have encouraged automakers. They see it as a novelty capable of exciting consumers concerned about the environment, while generating a new market driven by sustainability guidelines.

On the other hand, innovation still brings uncertainty to the ethanol producer. Today, when thinking about a “green car”, what comes to mind for the consumer is the battery electric vehicle—no longer the one that uses fuel from bio-based raw material.

Meanwhile, another innovation being tested is the Fuel Cell Electric Vehicle (FCEV) powered by ethanol. Since many countries still produce electricity via fossil fuels, the BEV (Battery Electric Vehicle) continues to be seen as polluting, and thus loses value.

The ethanol-based electric model would normally be fueled with ethanol at the gas station, and the hydrogen generated from this biofuel would be able to charge the battery cells, allowing the car to run again, saving time and electricity.

Thus, the electric car can also benefit the ethanol producer, who currently sees more advantages in producing sugar to export for higher profit margins.

Doesn’t ethanol come from sugarcane?

The prospects are also good for ethanol made from corn. There are expectations that, by 2030, production from this feedstock will reach 10 billion liters in Brazil, increasing the national share from 15% to 20% (according to a study by the National Union of Corn Ethanol, or Unem).

For the 2022/23 corn harvest, Conab’s projection is of 126.9 million tons, an increase of 12.5% compared to the last year harvest in Brazil. Since this second harvest is the one that transforms the most corn into ethanol, the expectation is for growth in fuel production as well.

Corn is also a sustainable alternative. Producing ethanol from this feedstock would, not only increment the biofuel supply but also increase both products relevance.

In addition to corn, there’s another new source of ethanol emerging in the country. It’s wheat, which is already common in Europe and Canada. In Brazil, the technology is just beginning, and it should provide a good alternative to meet the demands of this growing market.

The project has already started in the state of Rio Grande do Sul, and should be producing ethanol by 2024.

How can you protect yourself from variations in the ethanol market?

As ethanol production depends on sugarcane and corn, the market is at the mercy of the availability of these products, which makes the scenario quite unstable.

We know that in terms of the economy, instability means price fluctuations. During a single year, the value of ethanol can have high variations. Therefore, it’s vital for you to set up a good risk management strategy.

Your best option is to rely on a partner who specializes in hedging strategies, and has extensive understanding of financial markets, and, at the same time, the energy market in particular. Only from a broad view of such a complex context and global markets, is it possible to make the best decisions.

hEDGEpoint combines the knowledge of specialists in the ethanol market with risk management solutions through technology, and customized market intelligence Consulting, to always offer you the best experience in futures operations.

We’re globally present, always prepared to serve you at any time, and in any place. Get in touch with one of our specialists now to learn more about how to use our solutions to favor your business.

Talk to a hEDGEpoint specialist.




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