Feb. 3 (Bloomberg) -- Millers in Brazil, the world’s largest sugar producer, will favor ethanol output at the beginning of this year’s cane harvest because sugar prices are low, according to a joint venture of Royal Dutch Shell Plc and Cosan Industria & Commercia SA.
Measures taken by Brazil’s government to increase fuel prices and raise the amount of ethanol blended into gasoline will help boost biofuel demand, said Ivan Melo, a commercial director at the joint venture known as Raizen. Sugar fell 16 percent last year and 27 percent in 2011, the biggest two-year drop since 1999. Raizen produces sugar and ethanol.
“With gasoline prices rising 6.6 percent, hydrous ethanol is now more competitive,” Melo said in an interview at the Kingsman sugar conference in Dubai yesterday, referring to the 100 percent ethanol fuel used in flex fuel cars. “If the harvest starts with sugar prices at current levels, we will begin the season with more incentive to make ethanol.”
Petroleo Brasileiro SA, Brazil’s state-controlled oil company, increased gasoline prices at refineries by 6.6 percent last week. The government also said it will raise the amount of anhydrous ethanol blended into gasoline to 25 percent in May from 20 percent now. Brazil’s control over gasoline prices in a bid to limit inflation had made ethanol uncompetitive.
Millers in Brazil directed 49.59 percent of all their sugar cane in the 2012-13 season to make sugar, as prices for the sweetener were still more favorable, data from industry group Unica showed. That was up from 48.44 percent a year earlier. The allocation of raw material to ethanol is likely to change this year, as the increase in the blend will generate additional ethanol demand of 1.2 billion liters (3.2 billion gallons), Melo estimates.
Brazil will harvest a record 585 million metric tons of sugar cane in the 2013-14 season that starts in April there, according to Raizen. That’s up from 531.9 million tons in 2012-13, Unica data show. Sugar output is currently estimated at 36.3 million tons, Melo said. That could still change depending on how the government’s measures affect ethanol consumption, he said.
Millers in the South American nation have been holding back sales of this year’s crop in the futures market due to uncertainty over what will happen to ethanol demand, Melo said. Sales are currently estimated at 30 percent to 40 percent of output, he said. At this time of year, millers would usually have sold about 50 percent, according to Armajaro Trading Group Ltd., a London-based supplier of sugar, cocoa and coffee.
With the outlook for sugar’s crop “good,” Brazil probably hasn’t sold enough sugar in the futures market, Melo said. If the harvest is disrupted, and sugar supplies are lower than last year, then Brazil was “just about right” to hold back on sales, he said.
Sugar, the third worse performing commodity in the Standard & Poors GSCI gauge of 24 raw materials last year, will trade at 17 cents and 20 cents a pound during this year’s harvest in Brazil, which runs from April to December, Melo said. Sugar is down 3.2 percent this year, with speculators boosting bets on lower prices by 28 percent, data from the U.S. Commodity Futures Trading Commission showed. Net-short positions were 75,108 lots as of Jan. 29, up from 58,621 contracts at the end of last year.
“Who said the current measures are the only ones the government will take?” Melo said. “If the government takes more steps that give the incentive for hydrous ethanol consumption, the shorts will need to start getting worried, though any measure taken by the government will not be enough to erase the world’s sugar surplus.”
Sugar supplies will be about 8 million tons higher than demand in the 12 months starting in April, Raizen estimates. Raw sugar for March delivery rose 0.6 percent to 18.89 cents a pound on Feb. 1 on ICE Futures U.S. in New York.
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