Thursday's tumble in the Brazilian real's value against the US dollar could hamper ethanol exports from the US to Brazil, sources said.
"It certainly isn't bullish for exports to Brazil," said one source. "I assume we will see impacts in the ethanol price there, and with sugar pushing lower we'll have to keep an eye on guys switching towards ethanol."
Political turmoil in Brazil emerged late Wednesday with the current president, Michel Temer, accused of being involved in bribery to silence a key witness in the country's largest corruption investigation, the "Lava-Jato."
The allegations triggered a plunged in the Brazilian real on Thursday. The US dollar/real exchange rate was 3.3589 at 12:45 pm CDT after it was 3.1234 on Wednesday. The Ibovespa suffered "an interruption during the day as the drop caused a circuit breaker."
The immediate impact is unlikely to be high, as few cargoes are currently being booked for Brazil.
"I think a lot of it had to do with the uncertainty of a tariff on US imports," said the source. "That has kept the market on edge and not moving on anything."
Brazil was the top buyer of US ethanol exports in 2016, taking 27% of all exports. Through March of this year, Brazil has accounted for 39%.
Brazilian ethanol producers have called on the government to reinstate the country's ethanol import tariff, which was suspended in October 2011 until 2019.
Surging imports in 2016 and 2017, however, have prompted producers to ask for the tariff to return. A vote on the tariff was postponed until June.
With Brazil short on ethanol over the past two years, the country turned to a net importer for the first time. Historically, Brazil has been the biggest competitor of the US in global ethanol exports. But with a weaker real, Brazilian product could become more attractive.
"When the real gets weaker, Brazil is able to attract ethanol buyers," said a second source. "But with US pricing also so cheap and turnarounds nearing an end, it is hard to say what may happen in the imminent future. A weaker real certainly does not incentivize imports."
Market participants were unsure what might happen to the real's value in the coming days, but the first source said it would not take long for a weak real to impact exports.
"I will look at how the arb is impacted today after the settles get posted, but it may not be long," the source said.
Sugarcane is the primary feedstock for Brazilian ethanol and mills have to decide whether to process the cane for sugar or ethanol.
As sugar prices have been higher over the past year, more of the crush has gone toward sugar production. But with sugar prices retreating in recent days, mills could return to higher ethanol production.
