SAO PAULO - Brazilian sugar cane mills, the world's top producers, have visions of motorists from New York to Tokyo filling their tanks with ethanol, making the biofuel a full-fledged world commodity and making local producers as rich as Saudi sheiks.
But many observers doubt Brazil's ability to become a reliable international ethanol supplier. A disappointing cane harvest and thin ethanol stocks have helped lift sugar prices to 25-year highs, and the government has demanded price caps on the fuel.
Mills are struggling to build adequate fuel stocks to keep local prices from spiking. Any surprise such as a drought in the main cane-growing region would only exacerbate the problems.
The International Energy Agency said ethanol could make up as much as 10 percent of the world's gasoline mix by 2025. US President George W. Bush is looking to wean the United States off its dependence on oil imports by boosting production of energy alternatives including ethanol.
"There is huge demand for direct shipments of anhydrous ethanol from Brazil to the United States even with the 54 cent (per gallon) tariff," said Ernesto Coutinho, an ethanol specialist for international analysts Societe J Kingsman.
"So far, no contracts have been closed to the US but prices set for shipments to other destinations are rising well into harvest," he said.
Brazil's main cane region entered the interharvest period in December. With the government worried about tight ethanol supplies and rising prices, mills pledged to begin the harvest earlier than normal in March.
FIRM PRICES
Sugar and ethanol prices traditionally fall as the center-south cane harvest advances. But traders are reporting export contract prices into June show no such decline this year, despite the forecast of a much larger crop.
A contract for February-March delivery of anhydrous ethanol closed last month for $520 a cubic meter. But a contract for 15,000 cubic meters closed for May delivery FOB Santos for $550 a cubic meter, Coutinho said. Another contract was booked this week for March delivery at $560 a cubic meter FOB Santos.
"I'm not sure about rising prices but it is possible we may not see prices fall," said Julio Maria Borges, head of JOB Economia consultants, adding sugar futures on the local BM&F exchange were atypically firm well into the harvest months.
International sugar futures have been at 25-year highs, which tend to attract mills to turn more cane into sugar during harvest. Mills expressed concerns about supplying the local ethanol market in light of world sugar prices.
Specialists in Brazil's sugar-ethanol industry have fretted over the government's demand for a local price cap on ethanol and are worried it could impose export quotas if international prices become too attractive.
"If they took such an action, it would be out of sheer incompetence," said Borges. "There is no need for it. If ethanol prices rise, motorists can switch to gasoline. That is the benefit of the flex-fuel car."
More Brazilian drivers are buying flex-fuel vehicles that can run on gasoline, ethanol or any blend of the two.
"The government would prefer to reach a voluntary agreement with the cane industry rather than imposing something on it," Angelo Bressan, director of the agriculture ministry's cane and agroenergy department, said when asked what the government might do in the event of a strong international draw on Brazilian ethanol supplies.
The main center-south cane mill association Unica downplayed the chance of increased ethanol exports.
"We don't expect exports to reach last year's levels of 2.4 billion liters, in fact we doubt they will even reach half that" this year, Unica's technical director, Antonio de Padua Rodrigues, said.
Story by Reese Ewing
REUTERS NEWS SERVICE
