Jan. 31 (Bloomberg) -- Brazil is facing surging power prices and crop damage from a prolonged dry period and high temperatures, complicating efforts to rein in inflation.
A benchmark electricity price rose to a record today as a lack of rainfall during the traditional wet season drives down hydro-power dam levels. Sugar-cane and coffee output for the 2014-15 crop season is expected to be curbed in the country’s main growing area, according to consultants including Job Economia & Planejamento.
Costlier electricity and crop disruptions stand to hamper the government’s efforts to slow above-target inflation. Consumer prices last year rose 5.91 percent, above the 4.5 percent target for the fourth-straight year, even after President Dilma Rousseff cut power rates at the start of 2013.
“The government has no fiscal room to accommodate an increase in electricity costs, so likely we’ll see the increase going to consumers,” Luciano Rostagno, the chief strategist at Banco Mizuho do Brasil, said in a telephone interview from Sao Paulo. “This is a source of pressure to inflation this year.”
The weekly spot price, known as PLD, rose 69 percent to 822.83 reais ($341.03) per megawatt-hour for the southeastern and central regions, the country’s wealthiest and most populated, from 486.59 reais last week, according to data published today on the website of the energy trading board, or CCEE. The 822.83-real PLD price is the ceiling for spot prices this year, according to information at Brazil’s electric regulator website. The previous record was set in July 2001 at 684 reais, CCEE said in an e-mailed response to questions.
While the bulk of Brazilian energy is sold through fixed-contracts, generators are allowed to sell excess production on the spot market, where it can be bought by industrial consumers as well as distributors who aren’t fully supplied through fixed-contracts. Hydro-power accounts for about 70 percent of Brazil’s electricity production.
Water reservoirs in the southeastern and central area are at 40.7 percent capacity, compared with the 32.9 percent a year ago, when spots prices also jumped. The difference with last year is that dams started the rainy season in November at low levels and recovered with rains that fell between January and March, according to Rodolfo Salazar, commercial director of electricity trader Bolt Comercializadora.
“This year, it’s not raining there during the rainy season, which means water availability is low,” Salazar said in an interview. The situation signals low levels in the drier, winter months from May to October, he said.
Brazilian distribution utilities may face losses of as much as 15 billion reais this year on high energy prices because they are 3.5 gigawatts below their power needs, Erico Evaristo, president of Bolt Comercializadora, said.
“Government will have to help them again this year, or face the risk of the companies passing the bill to customers through rate raises,” Evaristo said in a phone interview from Sao Paulo. “I don’t believe the government will allow such an increase in an election year”.
Brazil is gearing up for a general election in October, when Rousseff is eligible to run. Electricity prices fell 15.7 percent in 2013 after a 2.9 percent increase in 2012, according to the national statistics institute. That’s due to a reduction of power rates Rousseff implemented in a bid to ease inflation and boost manufacturing.
Brazil’s central bank announced today the government’s budget gap in 2013 reached 157.6 billion reais, the biggest year-end deficit since the series started in 2002. Ratings companies Moody’s Investors Service and Standard and Poor’s last year cut their outlook for Brazil’s sovereign credit ratings, citing slow growth and deteriorating fiscal accounts.
While the amount of crops that could be affected is yet to be determined, a lack of rain is expected to reduce agriculture yields, weather forecasting consultant Somar said today in an e-mailed statement.
The growing areas aren’t expecting regular rainfall until the second half of February, it said. Brazil is the world’s largest coffee grower and biggest sugar producer.
“The dry weather will hurt the crop,” Julio Maria Borges, head of Sao Paulo-based industry researcher Job Economia & Planejamento, said in a telephone interview, referring to sugar-cane.
While Brazil’s coffee growing areas have sufficient soil water from rain in December, this month’s precipitation was 30 percent to 50 percent below January’s average historical volume, Commodity Weather Group’s director of agricultural services said earlier today.
As an extended dry spell is forecast for Brazil in February, including the primary growing region in the Center South, Somar is predicting “certain” crop losses.
“We don’t see any significant shower activity in the next two weeks,” increasing stress on cane, coffee and citrus plants in northeastern Sao Paulo and southwest Minas Gerais, Joel Widenor, the director of agricultural services at Bethesda, Maryland-based Commodity Weather Group, said today in a telephone interview.
Still, rain in March could help prevent further losses, Michael McDougall, a senior vice president at Newedge Group in New York, said today in an e-mailed report.
To contact the editor responsible for this story: James Attwood at email@example.com