In Brazil, the hand-to-mouth ethanol supply system has finally run its course. There are no stockpiles of the product to speak of and the system goes from one harvest to the next, year after year, with regular shortfalls (and price spikes) between the harvest seasons.
This year the shortfall and price spike have been especially sharp so the minister of Agriculture, Reinhold Stephanes, has stepped up and called for a large backup stockpile. And the Development Bank (BNDES) will step in with some 2.5 billion Brazilian reais (US$ 1.38 billion).
“By April or May, when the harvest gets underway, the market will normalize and we believe there will be a sufficient amount of ethanol to allow us to set aside some for a strategic stockpile even if the demand for sugar continues high,” said the minister, adding that the ideal would be to have a reserve cushion of around three months consumption, which would mean the creation of a stockpile of some 5 billion liters.
“There has to be a commitment. It is the Brazilian domestic market that sustains the ethanol industry. That industry owes the Brazilian consumer some loyalty. When we see what is going on at this moment, prices rising above an adequate level, it means the consumer is not being respected. Even though we had serious problems with rain this year, there has to be planning to avoid a repetition of this in the future,” declared Stephanes.
The minister added that financing for stockpiles would only be available in the second half of the year when prices normalize, which means that it will once again be economical for drivers to fill up with ethanol rather than gasoline.
At the moment, that situation exists in few places in Brazil (because of the difference in mileage obtained with ethanol and gasoline, it is only economical to use ethanol when its price is less than 70% of the price of gasoline).
Stephanes had two other ideas for dealing with the ethanol problem. He said that an ethanol futures market could help reduce oscillations in the price of the product and with the price where it is at this time it might be a good idea to import ethanol if the import surtax was reduced to zero.
“This is a typical situation that market forces resolve. When things reach a certain point, the market imports,” he said, adding that if Brazil imported ethanol it would also have a certain symbolic value – in the sense that it would give negotiations to establish an international ethanol market a boost.
This week, on Tuesday, Jan 26, Stephanes will join the minister of Finance and representatives of the sugarcane mill owners union (UNICA) to discuss the future of the sector and how to resolve its problems.
The Minister of Mines and Energy, Edison Lobão said on Monday he does not like the idea of Brazil importing ethanol from the United States. However, he admitted that the hypothesis is already being considered by his office with the objective of supplying the domestic fuel market.
He talked about such a possibility in the afternoon, when he arrived to chair the meeting of the Monitoring Committee of the Electric System (CMSE).
“We do not like the idea of importing ethanol. I’d rather get a domestic solution. But the possibility it is not ruled out,” said Lobão.
In an attempt to increase the supply of ethanol in the Brazilian market, the government has already pledged to reduce starting February 1st, from 25% to 20% the amount of ethanol added to gasoline.