Friday, May 6, 2011

Could Brazil Run Out of Ethanol?

Corn is currently heading into a seasonal downtrend in summer trading where contracts reflect increased certainty about crop planting. However, longer term fundamental effects continue to add upwards pressure on prices. A lack of investment in technology and continuing high energy use are contributing to high prices.

The Brazilian-USA ethanol trade relationship is somewhat complicated. Due to tariffs, Brazilian exporters have long sent ethanol to the USA - but doing so through intermediaries in the Caribbean which benefit from sunny tax treatment by US tax authorities. The US tariff is meant to protect US corn farmers. At long last, Congressional (or should I say, lobbying) efforts have paid off. Brazil is currently about to enter a short to medium term decline in ethanol production.

Czarnikow: Brazil Could Run Out Of Bio-Ethanol
Brazil could potentially run out of ethanol supplies, needing a further 100 million tons of cane to meet peak demand in 2011, one of the U.K.'s oldest sugar trade houses said.

"As a result of ethanol output disappointing for the second season in succession, supply has been unable to match the rise in demand resulting in a chronic shortfall in availability," Czarnikow said.

In Brazil, a lack of new investment in cane production, rising sugar prices and production, and underlying weaknesses in the earnings structure resulted in ethanol production falling short of 2010/11 forecasts, reaching only 25.3 billion litres, only 3% higher than 2009/10.

In Europe, member states face supply issues given the implementation of higher blend rates as the European Union targets to source 20% of energy from renewable sources by 2020, Czarnikow said.

But Czarnikow analyst Henry Toller said despite the bio-ethanol market facing challenges to expand, the history of the market since 2003 shows growth is always achievable.

The U.S. meanwhile has swung from a net-importer to exporter over the last 18 months, to become the most reliable hub of ethanol supply for other nations.

Czarnikow estimates that U.S. exports will continue in 2011 as U.S. production now exceeds gasohol demand by 5%. "Even Brazil has had to turn to the U.S. to supply ethanol due to the temporary shortage being faced in its domestic market today."

Source: CME News for Tomorrow

The Bottom Line: Brazil, long a chief exporter of ethanol, is running short on production due to a lack of investment in technology. At the same time, US corn farmers are benefiting from high prices and the tariff imposed by tax authorities. In fact, Brazil may have to turn to the USA to import additional supplies.
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