Cumulative 2020-21 Center-South Brazil output of anhydrous ethanol from April 1 to July 1 totaled 2.82 billion liters, marking a drop of 13% from a year earlier, according to trade association UNICA.
The cumulative quantity of CS hydrous ethanol produced over the same period was 7.18 billion liters, or only down 4.0% from the previous year, UNICA data showed.
The much greater 13% drop in anhydrous ethanol production compared with the 4% decrease in hydrous ethanol production can be explained by mills seeking higher profits. A pandemic-induced decrease for gasoline, a 6% higher associated cost of producing anhydrous ethanol, and the current ability for mills to substitute delivery of anhydrous ethanol with hydrous ethanol in previously agreed long-term purchase agreements for anhydrous ethanol with distributors were some of the reasons mills have favored producing hydrous ethanol over anhydrous ethanol since April 1.
Depressed ethanol sales
Anhydrous ethanol sales by CS mills in 2020-21 from April 1 to July 1 totaled 1.95 billion liters or 19% lower year on year, with 1.75 billion liters going to the domestic market and 196 million liters for export, according to UNICA.
Hydrous ethanol sales by CS mills in 2020-21 from Apr 1 to July 1 totaled 4.43 billion liters, down 24% year on year, with 4.13 billion liters going to the domestic market and 297 million liters for export, UNICA data showed.
The reason CS anhydrous ethanol sales have fallen less than hydrous ethanol sales was because gasoline sales have fallen less than hydrous ethanol sales since April 1. Brazil gasoline has a mandatory blend of 27.5% anhydrous ethanol
Although gasoline sales have fallen less, hydrous ethanol has remained economically advantageous over gasoline for drivers in southeastern Brazil, weekly data showed.
The April 1 to July 1 weekly average for hydrous ethanol price ratio to gasoline was 65.06%, well below the 70% threshold that encourages consumers to fill their tanks with hydrous ethanol, or E100, according to data released by the National Petroleum and Biofuel Agency (ANP).
Consumers with flex-fuel vehicles can fill their tanks with either gasoline, which has a blend of 27.5% anhydrous ethanol, or E100. Consumers generally fill their tanks with E100 only when its price is 70% or less than the gasoline price, because of hydrous' lower energy content.
High stock levels
Brazilian CS ethanol stocks have attained record highs of 5.83 billion liters or an increase of 40.5% on the year as of the end of June, according to the Ministry of Agriculture and Livestock (MAPA).
CS hydrous ethanol stocks were recorded at 3.86 billion liters or 66.25% of total ethanol stocks and an increase of 58.7% year on year.
CS anhydrous ethanol stocks were recorded at 1.97 billion liters of total stocks, a decrease of 5.7% from last year's record high stock level of 2.08 billion liters.
Brazilian CS ethanol stocks attained elevated levels between April 1 and July 1 because of decreased ethanol demand due to the spread of coronavirus and increased ethanol production because of higher quality cane and advancements in milling technology.
Decreased spot market activity
According to ANP Resolution No. 67/2011, a distributor must purchase 90% of the total volume of anhydrous ethanol sold during the previous calendar year.
There is no ANP mandatory purchase requirement for hydrous ethanol in Brazil.
The spread of the coronavirus in Brazil in late February and early March and associated demand destruction for gasoline and ethanol caused ANP to reduce the mandatory amount of anhydrous ethanol a distributor must purchase to 74% from 90% of the total volume of anhydrous ethanol sold during the previous calendar year. ANP also reduced the typical 12 month contract to 11 months starting on July 1 and ending on May 31, 2021.
The majority of CS distributors have finalized their long-term anhydrous ethanol purchase agreements for the next 11 months according to several market sources.
Although not an ANP mandatory requirement, most distributors have entered into long-term purchase agreements to cover their annual demand for hydrous ethanol, committed to buy 30-60% of their annual hydrous ethanol demand.
Any volumes needed beyond these long-term purchase agreements with hydrous and anhydrous ethanol are bought in the spot market.
The decreased demand for ethanol since the start of the pandemic has allowed the majority of distributors in the CS to meet the current demand for ethanol with volumes already agreed upon in long-term purchase agreements entered into with mills.
"The ethanol spot market is very active when distributors and mills are needing to buy or sell in large volumes outside of previously agreed long-term contracts. Given the current environment of depressed ethanol demand because of the spread of the coronavirus, the spot market has witnessed a decline in trading volumes," said a broker based in Rio de Janeiro.
Looking ahead, if the spread of the coronavirus in Brazil slows and quarantines are relaxed further, fuel demand will likely increase and most distributors and mills expect a much busier ethanol spot market, especially in the anhydrous ethanol spot market during the last half of 2020 according to several market sources.
