It turns out that sugar prices are up about 47% in the past year while ethanol prices, which are set by the government, often don’t meet production costs, according to Bloomberg.
Part of the problem is that Brazilian drivers have figured out that when ethanol pump prices exceed 70% of gasoline prices, gasoline is a better value because it contains more energy than ethanol. Thus, in order to keep pump sales going, ethanol revenue is effectively capped despite the production costs.
Another part of the problem is that the government regulates gasoline prices through a division of Petroleo Brasileiro SA (NYSE: PBR), or Petrobras. This has the effect of regulating ethanol pump prices at the same time.
Sugar has none of these problems. It is widely and freely traded globally. This is leading at least some ethanol producers to invest in sugar mills as opposed to ethanol production capability.
One interesting side-light from this is that as Brazilian ethanol production fails to keep up with demand, US producers may find a market for more of their corn-based ethanol in Brazil. That would be ironic, given the US duty on ethanol imports. Still, this could be a boon to ethanol producers like Archer-Daniels-Midland Co. (NYSE: ADM) and Valero Energy Corp. (NYSE: VLO).
Paul Ausick
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