Cash-Strapped Brazilians Behind Sugar's Best Gains in Four Years

  • Drivers in Brazil are filling their tank with cheaper ethanol
  • Raw sugar is top performer in commodity index this quarter

One reason behind the biggest sugar rally since 2011: Brazil’s deepening economic crisis.

To save money in what’s shaping up to be the country’s longest recession since 1931, Brazilian motorists are filling their tank with cheaper ethanol instead of gasoline, according to Plinio Nastari, president of Datagro Ltd., an agricultural research firm. More ethanol consumption means higher demand for sugar cane, helping send prices for raw sugar up 39 percent since late August.

"People continue to fill up with ethanol simply because the amount they spend per tank is smaller," Nastari said in an interview on Tuesday at the International Sugar Organization conference in London. "Why is the sugar price at this level? Because the market thinks ethanol prices could still rise further."

Raw sugar is the best-performing contract in the Bloomberg Commodity Index this quarter, with a 15 percent gain after El Nino rains delayed the harvest in Brazil’s main producing area and lowered the sugar content in the cane. Concerns about Brazil’s ability to meet ethanol demand in the first quarter next year, when the nation is between harvests, has driven the price of wholesale ethanol to the highest since 2011, according to Centro de Estudos Avancados em Economia Aplicada, a unit of the University of Sao Paulo known as Esalq.

"There’s still room for ethanol prices to rise if supply is to meet demand during the intercrop," Nastari said. "People are feeling the effect of the economic crisis."

While sugar has seen brief rallies over the past four years, most of the time it’s been in steady decline and prices are half the level from 2011. The recent gains are the biggest by percentage points since a 53 percent surge in the middle of 2011.

In Brazil, drivers can choose between pure ethanol or a mixture with gasoline. It costs less to buy a tank of the biofuel, but a car will drive longer on a tank of gasoline. The two fuels reach parity by price per kilometer driven when a liter of ethanol is 70 percent of the cost of gasoline.

Prices for ethanol in the Sao Paulo state have been higher than that for the past two weeks, Nastari said. It would need to reach 72 percent to 74 percent of gasoline to dent demand, he said.

Brazil will need to import 530 million liters (140 million gallons) of ethanol in the 2015-16 season to meet demand, up from a previous forecast of 415 million liters, Datagro forecasts. Imports may also increase as dry weather in northeastern Brazil means cane output in the region will be 52 million metric tons, down from a previous forecast for 59.2 million tons.

Other factors that may help ethanol demand: the government is considering whether to raise the tax on gasoline and Petroleo Brasileiro SA, or Petrobras, may push for higher gasoline prices, Nastari said.

Before it's here, it's on the Bloomberg Terminal.