The country is one of the world’s largest producers of this renewable fuel, known for powering cars and serving as a raw material in industries.

Currently, there are prospects for changes related to this commodity: among them, the increase in the mixture of ethanol in gasoline. With this in mind, we invited Lívea Coda, Market Intelligence Coordinator at Hedgepoint, to talk about:

• The dynamics of ethanol production and marketing in Brazil.
• Supply and demand indicators.
• Bill (PL) that provides for the addition of up to 35% ethanol to the country’s gasoline.

How does the Brazilian ethanol market work?

The first thing you need to know is that ethanol is produced by fermenting starch or other sugars of plant origin. In Brazil, the main raw material used is sugar cane, followed by corn.

There are two types of ethanol in fuels: anhydrous and hydrated. The difference between them is the concentration of water: in hydrous, water can reach 5% and in anhydrous, 0.5%. As a result, anhydrous ethanol contains much more alcohol than water. This is what makes it practically pure alcohol. Coda explains the difference between its uses:

“Hydrous is what we use directly in flex-fuel cars, because they run 100% on renewable fuel. The anhydrous, which has greater combustion power, is mixed with gasoline, according to the percentage established by law. This forms C gasoline, which is sold at gas stations. Gasoline A is what we have before this mixture,” he says.

Today, Brazil needs to import oil for gasoline. According to Coda, we have a certain sufficiency of production, but it’s not total:

“We still need to import a lot, because the octane rating of Brazilian oil is not as good as the octane rating of other countries. So there is a need to import because of the quality of this oil, which also differs between the country’s regions,” he says.

 

Prospects for ethanol supply and demand

There are two key factors in understanding ethanol supply and demand. Below, we highlight each of them.

• Supply: sugar and corn production

In this respect, Coda explains that it is important to understand the producer’s decision: he must assess how much of his production will go to ethanol and how much to sugar. Prices are a relevant aspect, as the producer is looking to make more profit from the product that will pay more:

“If ethanol is paying much more than sugar, you maximize the volume of raw product that will produce ethanol,” he comments.

Today, sugar has consistently paid more since the 22/23 harvest, which was marked by a recovery in Brazilian production, with a record in 23/24. At the same time, the Northern Hemisphere saw a drop in the harvest, which made prices more attractive for Brazilian producers.

In the case of corn, around 7 billion liters of corn ethanol are expected to be produced this year, a figure that is growing every year:

“There is a high level of investment in new corn ethanol plants. We have also seen very high productivity, because the technology used is very new,” says Coda.

Read also:

The Ethanol Market: Current scenario and future prospects  

Another important point is demand. In this regard, there is the role of ethanol distributors and gas stations:

“Both analyze demand, i.e. consumer preference for ethanol or gasoline. There are also significant regional differences. In the South, for example, ethanol is more expensive because of logistics and lower production. In the Center-South, the parity is usually lower, giving ethanol more strength in the consumer’s choice,” explains Coda.

In recent years, the fall in the price of gasoline is one of the reasons for the reduction in demand for ethanol:

“Since July last year, there has been a return to parity in favor of ethanol, but demand has not been as strong as might have been expected. Despite regaining strength in the last three months, it’s still not enough to reduce stocks of the 23/24 sugar surplus,” points out Coda.

As a result, ethanol is expected to have a high volume of carryover stocks and this will keep prices low until the next harvest. However, if demand is strong in the next harvest, the price of ethanol could rise.

For 24/25, it is currently estimated that there will be around 2.6% growth in the Otto Cycle, which is the demand for energy: As a result, ethanol prices could be affected, as this figure puts pressure on the market because consumers need more product:

“This brings the chance of an increase in the price of ethanol. But in this new harvest, we don’t see any threat to the sugar mix, which should remain high. So, in 24/25, price increases could lead to cuts in demand, which is still recovering fragilely, especially in the context of reduced gasoline prices,” says Coda.

 

What are the possible impacts of increasing the blend of ethanol and gasoline to 35%?

Today, C gasoline must have a minimum percentage of 22% ethanol, with a maximum limit of 27.5%. However, the proposal to increase the percentage of ethanol to up to 35% should be discussed in the next few days in the Chamber of Deputies, through Bill 4516/23.

Initially, the federal government’s idea was to raise the maximum percentage from 27.5% to 30%, with the aim of improving energy independence. This is expected to reduce oil imports. In addition, the measure aims to boost decarbonization, as ethanol is a type of renewable energy.

However, the bill has undergone changes in the House and now provides for an increase from 22% to 27% in the mandatory percentage of anhydrous ethanol to be added to type C gasoline. The maximum limit is 35%, according to the bill.

Among the possible effects for the Brazilian commodities market, we highlight:

1. Impacts on the sugar market
   Increased demand for anhydrous ethanol could cause more Total Recoverable Sugar (ATR) to be diverted from the sugarcane harvest to biofuel production. However, Coda stresses that the growth in demand would probably be affected before ethanol reached the price of sugar.For this reason, it is difficult to project a change in the mix, not least because of the context of the sugar market and the contracts already signed by the mills for the new harvest.If the demand for ethanol is overheated, the price goes up.Then it may be, and it is more likely on 24/25, that there will be a cut in demand due to the rise in prices. Low demand leads to a build-up of stocks, which puts pressure on prices:

   “A fall in prices has a direct impact on production, and therefore on stocks, raising prices. This interaction between supply and demand brings balance. Remember that it must respect the

   physical limits of the mill and the contracts already signed. The relationship between sugar and ethanol prices is therefore one of the main decision drivers,” says Coda.

    

2.  Higher demand for anhydrous ethanol

“With the increase in ethanol blended into gasoline, the demand for anhydrous ethanol could grow, especially in relation to distributors. This is because they need to increase the amount added to the blend,” explains Coda.

This increase in consumption would stimulate greater production of this biofuel in industries, with a possible increase in installed capacity in this sector. It is possible that prices will rise or fall, which will depend on the relationship between supply and demand and production costs.

Read more:

•  General outlook for agricultural and energy commodities in 2024