The global sugar supply shortage is getting worse amid the ethanol-versus-sugar debate which is going on in Brazil. Brazil is a South American country that is one of the top exporters of sugar to many countries in Europe and North America. But, the price of ethanol due to easing COVID-19 restrictions and travel bans is increasing as the consumption of fuel has increased in the last few weeks. Hence, many sugar processing units are inclined towards processing more sugarcane into ethanol instead of sugar.
Prices of ethanol for mills in Sao Paulo, Brazil’s vibrant financial city has jumped 10% last in the first week of May making the biofuel potentially more profitable for many processing mills that are suffering for the last few months due to various restrictions imposed by the local authorities and trade disruptions. Brazil has already faced a cut in sugarcane supply due to severe droughts and sugarcane crushing went down by 30% in April, compared to a year ago according to industry group Unica. Dry weather in Thailand and aid cut by the Indian government for Indian sugar processors are among the major concerns for many food processing companies in Europe and North America.
Brazil finds it more economical to produce its own ethanol to increase the sugar production because prices for the fuel are already high in other exporting countries such as the United States, and it is expected to remain the same as the North American economy is recovering after the pandemic. The US market is experiencing a rise in travellers as vaccination progresses in the country. In fact, the current prices in the US are so high that biofuel produced in Brazil may start to look attractive to the companies. In the last year, the price of ethanol was increased by almost 100% in the US. The sudden surge in prices of biofuels has forced the Brazilian producers to switch to ethanol production by cutting down the supply of sugar to the rest of the world, which has already pushed sugar prices in New York by 73% in the last 12 months.
For the biofuel exporters in Brazil, it is still more profitable to process sugar than ethanol. BP-Bunge Bionergia, a sugarcane processor said the sugar will see a premium of up to 3 cents per pound before it goes down to 1 cent per pound. But, ethanol is becoming more expensive than regular gasoline in Brazil which means the demand for ethanol may sink as truckers in the country use both ethanol and gasoline, and usually buy whichever is cheaper in the local market. The only factor that can control the looming sugar shortage is the long-term deals that are already signed by the importers and exporters. The current sugarcane crop in Brazil is already sold in advance by exporters which means there will be high fees and penalties for cancelling the contracts if any trader wants to divert the current raw material to ethanol processors. If the ethanol prices rise to 22 cents a pound from the current price of 17 cents, then it will be profitable for the producers to cancel the contracts and produce more biofuel which they can sell in the local market.
