The Brazilian government may cut the ethanol blend into gasoline to 18% from the current 25% due a low supplies of the biofuel and sluggish production rates, agencia Estado reported late Friday.
A final decision will be discussed in the coming days during inter-ministerial meetings set up with sugarcane producers to evaluate the state of ethanol sector, the Brazilian news agency said.
So far this year, ethanol output in Brazil's center-south region has been 2.9 billion liters, down 29% from the same period of 2010 data from the sugarcane industry association UNICA shows.
Production has been lagging due to a slow start to the harvest due to heavy rains in the center-south of the country.
In addition, extremely dry weather in last months of 2010 hindered the development of crops and hit yields.
"There has been uneasiness about the [2011 harvest] results, which are below expectations," minister of agriculture Wagner Rossi said.
The weaker-than-expected sugarcane harvest has kept ethanol prices at parity with gasoline at most Brazilian pumps, the national petroleum agency ANP said.
In Brazil, fuel ethanol loses competitiveness at filling stations when it goes over 70% of the price of gasoline, making drivers of flex-fuel cars switch to the fossil fuel.
But high ethanol prices also inflate the value of gasoline, as the sugarcane-derived additive makes 25% of the final blending mix.
A government decree published in Brazil's official Gazette on April 29 reduced the lower blending threshold for ethanol to 18% from 20%.
But mandatory blending has up to now remained at 25% to avoid an increase in gasoline consumption and further upward pressure on inflation.
According to state-controlled oil major Petrobras, gasoline refineries in Brazil operated at 92% of capacity during the first quarter of the year.
That means any significant increases in demand would have to met by imports.
"It's not a very comfortable situation right now, because every adjustment has a consequence," Rossi said.
If the mix drops to 18%, the monthly ethanol demand for blending into gasoline could drop by 182,000 cubic meters to 468,000 cu m.
If the threshold goes down to 20%, consumption of ethanol for blending would be cut down by 130,000 cu m.
