South America Calling

Brazil will raise the percentage of ethanol in gasoline fuel from 20% to 25% from May 1, Mines and Energy Minister Edison Lobao announced Friday.

The move will automatically boost demand for cane ethanol, as these additives account for 35% of total production.

President Dilma Rousseff opted to reinstate the level at 25% following assurances from the sugarcane industry that a record crop in 2013-14 would be sufficient to meet demand.

Brazil's Sugarcane Industry Association (UNICA) predicts ample recent rains will ensure a crop of 590 to 600 million metric tons (mmt) when the 2013-14 harvest begins in April, approximately 12% higher than the year before.

The sugarcane industry's inability to satisfy rising ethanol demand over recent years has caused Rousseff headaches.

Many Brazilian motorists switched to gasoline from ethanol fuel last year after insufficient ethanol supply caused prices to surge. Most cars run on any mixture of the two fuels.

That meant Brazil had to import gasoline, hurting the trade balance and state-run oil firm Petrobras, which was forced to sell the gas on for a loss. That will be less of an issue this year.

But the underlying problem remains. Prices offered for Brazilian ethanol simply don't stimulate investment in new sugarcane production.

Ethanol prices fluctuate freely but prices for gasoline don't. Since the government caps gasoline prices, as a means of controlling inflation, the ethanol market has an effective ceiling too.

In January, Petrobras raised gas prices by 6.6%, but that is a drop in the ocean.

According to Bloomberg, the government is thinking about exempting ethanol from certain taxes to increase its profitability. But millers say the problem isn't just the fact that the government holds gas under the market price, it's the uncertainty that the government intervention creates.

(AG)

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