Sugar Price Surge Fueling Debt? ... Brazil Increasing Ethanol Production

[Asia Economy Reporter Park Byung-hee] As raw material prices surge simultaneously, there are forecasts that inflation will become a major obstacle to the global economy. Prices of industrial raw materials such as iron ore and copper, as well as grain raw materials like corn and wheat, are all rising together.

Bloomberg reported on the 10th (local time) that sugar prices are also showing signs of concern. This is because a decrease in sugar production is expected in Brazil, the world's largest sugarcane producer and exporter.

Sugarcane is the raw material for sugar and ethanol used as biofuel. Recently, as ethanol prices in Brazil have risen sharply, there are forecasts that Brazilian sugarcane processors will produce more ethanol than sugar in the future.

The ethanol price at a sugarcane plant in S?o Paulo rose 10% last week, reaching the highest level since 2000. This is due to the increase in travelers worldwide as COVID-19 vaccinations expand, which in turn increases demand for biofuels.

For now, refining sugarcane into sugar for export remains more profitable than ethanol. A local sugarcane processing industry official said, "Until October, the export price of sugar can be up to 3 cents per pound higher than the ethanol export price, but after that, the gap will narrow to 1 cent."

If the current upward trend in ethanol prices continues, it is expected that sugar production will decrease and ethanol production will increase. Michael McDougall, director at Paragon Global Markets, said, "Biofuels have higher profitability."

Drought has negatively affected Brazil's sugarcane harvest this year. According to local companies, the sugarcane crush volume until mid-April this year decreased by 31% compared to the same period last year.

Sugar futures prices on the New York Exchange have risen 73% over the past year. If Brazil's sugar supply tightens, sugar prices are likely to rise further. The rise in sugar prices means an increase in food prices.

It is also not ideal for Brazil to import ethanol to resolve the ethanol supply shortage. This is because ethanol prices in other exporting countries like the United States have also risen significantly. U.S. ethanol prices have nearly doubled over the past year, making Brazil's import costs burdensome. The rise in U.S. ethanol prices has highlighted the price competitiveness of Brazilian ethanol, which in turn is driving up ethanol prices in Brazil. For sugarcane processors, this situation increasingly forces them to focus on fuel production.

However, the fact that ethanol prices in Brazil are currently higher than gasoline prices is expected to be a variable. In Brazil, both gasoline and ethanol are used as vehicle fuels, but since ethanol is more expensive than gasoline, ethanol demand may decrease in the future.