Domestic Brazilian ethanol prices rose Wednesday after reports in the local media pointed to an increased chance of the federal government imposing higher taxes on gasoline, sources said.
Talk of increases in taxes such as CIDE or PIS/Cofins have intensified in recent days as the government tries to meet budget targets, said financial newspaper Valor Economico.
A combination of increases in both taxes is currently under discussion because a rise in the CIDE would only be effective 90 days after being signed, while a PIS/Cofins hike could be effective immediately, the newspaper added.
Details on size of the increase were somewhat more murky.
While the CIDE tax would apply to gasoline only, a PIS/Cofins hike could impact both ethanol and gasoline, with the latter expected to see a larger increase than the biofuel.
"The information we have here is that [the tax increase] should be announced at any time now," said an ethanol producer.
Early Wednesday, distributors were reported to be raising their bid levels in order to attract sellers on a day when the amount of offers available was low, said sources.
S&P Global Platts assessed ex-mill Ribeirao Preto hydrous ethanol at Real 1,620/cu m ($514.49/cu m), up Real 20/cu m day on day and an increase of 2% or Real 35/cu m compared with a week ago.
Anhydrous ethanol ex-mill was assessed at Real 1,560/cu m, up Real 10/cu m day on day and 1% on the week.
An increase in the gasoline taxes is expected to benefit the ethanol industry, improving the hydrous ethanol floor and helping the biofuel's competitiveness against the fossil fuel at the pumps.
Hydrous fuel ethanol is used in Brazil as a standalone biofuel (E100) by flex-fuel vehicles and to be more competitive it has to be below 70% of the price of gasoline. Anhydrous ethanol is blended with gasoline at a 27% ratio.
State-owned Brazilian oil producer and refiner Petrobras has recently implemented a review of its pricing policy, moving from monthly adjustments to almost daily changes.
The latest price move, which will go into effect Thursday, will be the 11th daily change under the pricing policy implemented on July 1 and there has been a cumulative 2.7% decrease in gasoline prices.
Sugar prices also soared on Wednesday. The ICE NY Sugar 11 October futures contract rose 40 points to settle at 14.50 cents/lb. Sources said the increase came about due a combination of the possible announcement on the PIS/Cofins tax rise and details emerging of frost damage in Center-South Brazil.
A sugar trader also said the firming of the Real against the dollar and stronger-than-expected Chinese GDP data were supporting sugar prices.
PAST TAX INCREASES
On January 1, 2017 ethanol mills started to be charged Real 120.00/cu m under the PIS/Cofins tax, which had previously been suspended since April 2013.
At the time, ethanol producers expected the federal government to split the tax increase between gasoline and ethanol, which did not happen.
Following the reinstatement, both hydrous and anhydrous prices jumped Real 120/cu m, as producers added the tax onto the price for end-users.
The last increase in the CIDE tax for gasoline was implemented on February 1, 2015. At the time, the government called for the PIS/Cofins tax on gasoline to increase to 48 cents/liter immediately.
After 90 days, on May 1 that year, the CIDE tax on gasoline was reinstated at 10 cents/liter while the PIS/Cofins tax was cut to 38 cents/liter.
