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Government growth incentives for Brazil’s sugarcane ethanol industry could help bolster the country’s international competitiveness, at a time when seasonal planting problems are driving US corn prices higher.
Brazil’s current sugar crop is expected to be up 8.5% from last year, after dropping 24% between 2018 and 2019, the USDA projects. But the issues with the US corn crop and persistently low world sugar prices may further encourage diverting sugarcane away from sugar production and toward ethanol production. Last year, a record 65% of processed sugarcane was used in the production of ethanol. In the short term, the price of cane ethanol is likely to rise to meet demand if the situation continues to worsen for US corn, opening lucrative opportunities for Brazilian ethanol producers in the international market.
Brazil has been loosening regulations around ethanol and encouraging investments into the industry. The country’s sugarcane mills have become increasingly more flexible in the ability to switch between sugar and ethanol processing, and are now allowed to sell ethanol directly to gas stations to service the flex fuel vehicles that make up roughly 70% of Brazil’s automobiles on the road. The ability to sell directly from mills to gas distributors is intended to reduce consumer costs and increase profit margins for mills that have struggled in the face of declining sugar prices.
A still bigger push is happening in Brazil intended to increase the competitiveness of Brazilian ethanol on the international market, particularly in nations like China and India. RenovaBio, Brazil’s new national biofuel policy to be implemented in 2020, allows sugar-ethanol companies to receive tax-exempt investments. The move could facilitate investments of an estimated R$13 billion annually into the sector. About R$4 billion of that could go toward increasing sugarcane production, which has been declining over the past five years due to a combination of aging crops and a bearish market. The RenovaBio program is expected to nearly double Brazil’s cane ethanol production by 2030 and reduce greenhouse gas emissions by 10%. The RenovaBio policy’s rollout comes at a time when China is seeking to significantly expand ethanol consumption to meet its ambitious E10 requirements. Going forward, China’s two biggest international ethanol suppliers, the US and Brazil, will compete to meet the estimated 90 million tonnes of annual demand by 2020.