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Effect of mobility restrictions on sales and prices in the ethanol producing segment in São Paulo state

Hydrous ethanol (fuel) sales in São Paulo state decreased 35% in the partial of the 2020/21 crop (from April to September 2020) compared to the same period last year. The geometric growth rate for hydrous sales, which was 3.54% per year estimated considering data from 2003 to 2019 (monthly averages from April to September), decreases to 3.06% per year when information from 2020 is included.


As for anhydrous (fuel) sales in São Paulo state, the estimated geometric growth rate dropped from 4.57% per year (2003-2019) to 4.09% per year, when estimated considering data from 2003 to 2020 (averages from April to September in both cases). As for the average volume traded from April to September 2020, the decrease is more than 45% in relation to the same period in 2019.


After the pandemic has started, hydrous ethanol sales had decreased up to July, moving up rapidly in the following months. Comparing trades from September to those in July, there is a sharp increase of 37%. However, this trend shift was not able to underpin the average from April to September and it returned to the level observed in 2017. Since mobility restrictions imposed by the pandemic have started to be more flexible, anhydrous sales have increased 28%.


In this scenario of low demand, hydrous ethanol average prices, in real terms, in São Paulo state (deflated by IGPM) downed circa 13% in the partial of this season (from April to September) compared to the same period last year, and it is the lowest of the decade, considering the six first months of the crop year. This significant price drop was observed in spite of: 1) change in the ethanol and sugar production mix, favoring the food; 2) increase of exports and 3) increase of ethanol sales used to produce gel for health purposes, although the volume was not significant in this case.


It is worth mentioning that the hydrous price decrease was not attributed to a loss of competitiveness against gasoline in the state, because the price relation between these two fuels was favorable to ethanol in every month of the current crop year. The fuel demand has decreased in general, for both hydrous ethanol and gasoline, scenario that is reinforced by the lower pace of anhydrous sales, which is part of the fossil fuel sold at gas stations.


The decrease of hydrous sales has resulted in an unusual volume in stocks considering this period of the year compared to the previous. It can be said that the demand decreased more than the supply, although production has been lower in the 2020/21 season in relation to the previous, scenario that was mitigated by high ending stocks from 2019/20 to the current season compared to previous years. Moreover, the dry weather has favored cane cutting and crushing, encouraging the anticipation of the end of the crushing in some mills. This scenario results undoubtedly in an increase of hydrous inventories.


Stocks have a negative aspect related to financial costs (opportunity costs) resulting from the maintenance of fuel in tanks; in the case of ethanol, it can affect prices as there are needs to open room to stock the new product. This has occurred in some moments in the current crop year, mainly at the beginning of crushing activities. On the other hand, inventories can indicate that producing companies have a mature point of view when they postpone sales for financial needs, whenever is possible, limit excessive supply in the season period, aiming to avoid more significant price decreases.


The decrease of anhydrous production, in percentage terms, was higher compared to that observed for hydrous, and inventories in late September 2020 were similar to those in the same month last year. In spite of that, the average price decrease for anhydrous ethanol, in real terms, from April to September 2020 comparing to the same period in 2019, was practically the same registered for hydrous.


Still regarding anhydrous inventories, players are concerned whether there will be enough product to meet the off-season demand. An aspect that must be considered is the possible convertibility of hydrous to anhydrous ethanol, if necessary and if market conditions are favorable. The percentage decrease of anhydrous blended into gasoline A does not seem to be a plausible proposal, and there has been no percentage decrease since it changed to 27%, showing maturity and agility of players in the fuel market to guarantee the product for the off-season period. Moreover, if exporting anhydrous ethanol during the season and importing in the off-season period are considered financially interesting, it is compatible with market rules, given that maximizing profits must drive actions at companies. Financial needs of players in the ethanol business, which are higher during the season period, may also affect exporting decisions.


On the other hand, most part of anhydrous needs for the off-season period is guaranteed by current laws, which require closing previous contracts for the supply in every month of the crop year. Although the legislation has become more flexible this year, aiming to adequate more to atypical market conditions, it brings more safety for consumers in terms of supply. Another aspect that should be mentioned is the increase of the corn ethanol production during the sugarcane off-season.


In the current crop year, the production mix between sugar and ethanol has favored the food. The production mix is usually defined at the beginning of the crop year and it can be redefined, depending on relative prices of these products. However, it is important to mention that sugar production in this crop year has practically used the entire installed capacity, and significant changes favoring sugar are not expected for the coming crop years.


Although mobility restrictions are more severe in some European countries, due to covid-19’s second wave, this scenario is not expected in Brazil. Due to the return of economic activities, fuel sales may continue increasing. The price recovery will depend on how inventories will be flown to meet the domestic market and on the continuity of hydrous exports. Prices of this biofuel still have room to move up before the parity with gasoline prices is established. In some cases, ethanol prices are not covering production costs, which is concerning for both producers and the society as a whole. Sectors that have low remunerating prices stop investing in technologies that lead to productivity gains, which are essential to benefit consumers in the mid and long-terms.


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