Brazil Ethanol Tax Cut Won’t Be Enough to End Sugar Surplus

An ethanol tax cut in Brazil, the world’s largest sugar producer, won’t be enough to avoid a fourth annual surplus for the sweetener.

Sugar production in Brazil’s center south in 2013-14 will be 34 million metric tons with a tax cut or 35.2 million tons without a cut, according to the average estimate in a Bloomberg survey of six mill owners who make a third of the area’s supply. Center south output, the world’s top producing region, was an all-time high of 34.1 million tons last year.

Brazil President Dilma Rousseff plans to cut federal taxes on ethanol to rein in consumer prices, a government official with knowledge of the discussions said this month. Mills can switch production from cane to sugar or ethanol. Global sugar output will outpace demand by 3.8 million tons in the 2013-14 season that starts in April after a surplus of 7.6 million tons this season, Brisbane, Australia-based researcher Green Pool Commodity Specialists Pty. says.

“The tax cut is welcome, but will have limited impact on the market,” Plinio Nastari, president of Barueri, Brazil-based research company Datagro Ltd., told reporters in Sao Paulo on March 19.

Sugar Slump

Raw sugar prices have dropped 6.8 percent on ICE Futures U.S. in New York this year, after falling 39 percent the past two years because of surpluses. A third annual decline would be the longest slump since 1992. Prices jumped 4.7 percent in the week ended March 8 on speculation of ethanol tax cuts.

Brazil is preparing tax breaks on ethanol which include lower payments and the possibility of converting the amount paid into credit, two people with knowledge of the plan told Bloomberg in a story March 1. The changes may be announced before sugar cane starts getting to mills in April, one of the people said. Tax cuts may make the biofuel more competitive, encouraging mills to divert more cane to ethanol, according to Patricia Luis-Manso, an analyst at Lausanne, Switzerland-based researcher Kingsman SA, owned by The McGraw-Hill Cos.

“The reduction of taxes on ethanol has the potential to cut center south sugar production by as much as one million tons,” Ivan Melo, a commercial director at Raizen, a joint venture of Royal Dutch Shell Plc and Cosan SA Industria & Comercio, said by phone on March 19. “What will really determine how much cane gets directed to ethanol this season will be the price, if ethanol is above or below sugar.”

Ethanol Premium

Ethanol prices topped sugar on Feb. 7 for the first time since April 2011, Kingsman data show. The price of hydrous ethanol, the 100 percent biofuel used in flex fuel cars, was at 19.41 cents a pound on March 20, 5.8 percent more than raw sugar futures that day, according to Kingsman. It was down to 18.9 cents a pound today, Kingsman said. The biofuel tax may be lowered to 30 reais ($14.90) a cubic meter (35 cubic feet) from 120 reais a cubic meter now, broker J. Safra Corretora in Sao Paulo said in report on March 8.

Sugar cane output in Brazil’s center south will rise to a record 587 million tons in 2013-14, up 10 percent from the previous crop year, Datagro estimates. Global sugar supplies will climb to 184.2 million tons in 2012-13 amid increasing production from Brazil and India, the world’s leading producers, Czarnikow Group Ltd. forecast on March 20. That is up from 179 million tons in the previous 12-month period, the London-based company said.

Tip Balance

“At this moment, it’s as attractive to produce sugar as it is to produce ethanol,” Luiz Carlos Correa Carvalho, a director at Alto Alegre mill, said in a telephone interview from Piracicaba, Brazil, on March 15. “This measure could tip the balance in favor of ethanol.”

About 46.3 percent of the cane harvested this year will be used to make sugar, down from 49.6 percent a year earlier, Kingsman’s Luis-Manso said. While the tax cut will probably help boost ethanol demand at the pump, it’s still unclear how much of it will be passed on to the consumer, she said.

Ethanol has been losing market share in Brazil over the past three years to gasoline, more than 10 percent of which is being imported and sold at a loss by state-run Petroleo Brasileiro SA, known as Petrobras, according to Salim Morsy, an analyst at Bloomberg New Energy Finance’s Sao Paulo office. Lower ethanol prices have squeezed millers’ margins and investments in new ethanol projects fell from a peak of $6.4 billion in 2008 to $256 million last year, Morsy said.

A reduction in ethanol taxes would add to other steps already taken to boost demand for the biofuel. Brazil plans to increase the amount of anhydrous ethanol blended into gasoline to 25 percent from 20 percent, effective in May. It also allowed Petrobras to boost gasoline prices at refineries by 6.6 percent, making ethanol more competitive.

“The cane allocation to sugar will be lower than last year, given the increase in the inclusion rate in the blend, higher gasoline prices and better returns from hydrous ethanol,” said Peter de Klerk, a London-based analyst at Czarnikow, which traded sugar in over 90 countries in 2011. “Nevertheless the record cane crop could see a similar volume of sugar production if all goes well.”

(Updates sugar prices in fifth paragraph.)
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