A resurgence of U.S. ethanol imports is shaking up the $1.6-trillion world sugar market.
Commodities investors increasingly are betting that rising U.S. demand for sugar-based ethanol will reduce supplies of the sweetener and curb a decline in prices, which recently have fallen to 28-month lows.
Imports from Brazil, which distills most of its ethanol from sugar cane, have risen nearly ninefold this year through October, compared with the same period in 2011, according to the U.S. Department of Agriculture. U.S. demand for foreign-made ethanol jumped after an import tariff that had been on the books for three decades expired in January. U.S. ethanol imports are expected to surge again next year, with the vast majority coming from Brazil.
The sugar market is starting to feel the effects. Both sugar ethanol and corn ethanol, which is produced mainly in the U.S., have a similar chemical composition and are blended with other fuels to create cleaner-burning gasoline used in cars.
Commodities investors, analysts and ethanol producers say the opening of America’s ethanol market and rising demand for sugar-based ethanol in the U.S. and Brazil could end the recent slide in sugar prices. Futures prices have fallen 17% this year because many traders are expecting a big sugar crop out of Brazil next year.
Brazilian ethanol has flooded the U.S. market before, only to drop sharply later.
Analysts and investors say the latest ramp-up in ethanol imports is likely to be sustained. Ethanol output in the U.S. is declining, and federal regulations require that gasoline manufacturers boost their use of a category of renewable fuel that includes sugar ethanol but excludes its corn counterpart.
The more sugar cane that is diverted to ethanol production, the less that will be crushed to make brown, granulated raw sugar, reducing supply and potentially pushing prices higher.
“Demand [for ethanol] is sucking away more and more of the sugar supply,” says Kevin Kerr, president of commodities consultancy Kerr Trading International, which has $250 million under management. He has placed bullish bets on sugar futures stretching through 2013.
Sugar futures on Monday jumped 2.1% to 19.41 cents a pound, the highest level in over a week, on worries about poor growing conditions in Brazil. A recent period of dry weather in the top sugar-cane grower sparked concerns that next year’s harvest could disappoint.
Others say Brazil will have plenty of sugar to go around. The South American country will harvest a record 580 million metric tons next year, according to the International Sugar Organization. About half will go toward ethanol production.
With the ISO forecasting a 6.2 million metric-ton global sugar surplus next year, “sugar prices are probably going to be suppressed for a while,” says Sterling Smith, a futures specialist at Citigroup in Chicago. He calculates that if Brazil produces a record crop next year, there will be more than enough sugar cane to meet increased ethanol demand.
Whether or not Brazil grows enough sugar cane to satisfy the demand, the stepped-up presence of the U.S. in the market for the renewable fuel complicates the outlook for sugar, analysts say.
Brazil’s shipments to the U.S., which totaled roughly 336.7 million gallons (1.27 billion liters) in the first 10 months of 2012, are displacing ethanol produced domestically from corn. U.S. ethanol output will fall by 10% next year to about 12.6 billion gallons, according to Department of Agriculture and U.S. Department of Energy estimates.
Historically high corn prices have eaten into profits of domestic ethanol makers this year, prompting production cutbacks. And although corn prices have fallen 13% since they hit a record in August, many traders are worried about the lasting effects of this past summer’s drought.
“With the prices of corn as high as they are, there’s more pressure to import Brazilian ethanol,” says Fain Shaffer, president of commodities brokerage Infinity Trading Group in Medford, Ore. He recently placed bets on rising sugar prices.
Another factor traders are eyeing is Brazil’s own consumption of ethanol. Brazilian officials have said the country plans to increase the amount of ethanol blended into its gasoline to 25% from 20% next year, which will increase internal demand for sugar cane ethanol and could further reduce sugar supplies.
Kona Haque, commodities strategist with Macquarie in London, predicts higher sugar prices in 2013, saying everyone “is going to start looking more closely at what’s happening in ethanol.”