Brazil's sugar mills will reduce production and switch to ethanol due to the energy price spike

Analysts said that the sharp rise in energy prices due to the ongoing 'war' in the Middle East will cause Brazilian sugarcane processors?to produce more ethanol than sugar during the new upcoming?season. The ICE exchange's raw sugar futures jumped over 3% Monday, following gains in oil futures, as the market expects a lower sugar volume from Brazil's middle-south region, which is the world's biggest sugar-producing area.

Mills can adjust their plants to produce more sugar or ethanol, depending on the market price for each. If ethanol is more profitable, mills will use a greater amount of cane for the biofuel and less sugar to make it. Ethanol is currently cheaper and could?get even higher.

"More costly fossil fuels tend improve ethanol returns. This is what moves mills to allocate a greater share of their sugarcane to the production of ethanol," Arnaldo?Correa, managing director at Archer 'Consulting, an industry advisory firm, said.

He said that "in theory, the current situation would reduce the availability of sugar on the market and increase global prices."

Analysts said that one piece of the puzzle is still not moving. Petrobras is Brazil's state controlled oil company that supplies around 80% the gasoline in Brazil. It has not increased local prices despite the recent surge of oil.

ABICOM, a Brazilian fuel importers' group, estimates that gasoline prices in Brazil are currently 46% lower than import parity.

Michael McDougall said that Lula, the Brazilian president Luiz Inacio Lula da So, wants to maintain voter support despite the fact that the elections are only scheduled for October. Lula is likely to run for reelection in this year, and may want to keep the fuel prices down.

Datagro, a consultancy, predicted that Brazilian mills will 'cut the amount sugarcane used for sugar in the new season to 48.5% compared to 50.7% in the previous season. (Reporting from Marcelo Teixeira, New York; Additional Reporting by Oliver Griffin in Sao Paulo; May Angel in London; and Marta Nogueira, Rio de Janeiro; editing by Matthew Lewis).

(source: Reuters)