Brazilian state-controlled oil company Petrobras' 5.4pc cut in wholesale gasoline prices reinforced expectations that sugar cane mills will prolong their preference for sugar production over ethanol.
Since October 2016, Petrobras has been adjusting domestic gasoline and diesel prices on a monthly basis to align them with international prices. Since implementing the new fuel pricing policy, the company has lowered the gasoline price three times and left it unchanged once, only raising the price in December.
Petrobras said the recent strengthening of the Brazilian currency against the US dollar triggered the drop in the gasoline price this month.
Gasoline competes directly with hydrous ethanol at the pump. Prices of hydrous ethanol have not been competitive with gasoline at the pump for several months, according to the oil regulator ANP. To be considered competitive with gasoline, the price of hydrous needs to be less than 70pc of the retail gasoline price.
Cane industry analysts have already forecast lackluster growth in Brazil's main center-south ethanol output in the 2017-18 season that starts on 1 April. Moreover, strong sugar prices prompted by a global sugar supply deficit and increasingly weaker margins for ethanol have prompted mills to sell forward large volumes of the sugar from the upcoming crop, at the expense of their biofuel production.
Total ethanol output will also depend of the size of the upcoming crop, but so far, there is no consensus among forecasts.
Sugar and ethanol consultancy Datagro sees total center-south cane output reaching 612mn t in the 2017-18 season, with ethanol output falling by 1pc to 25.31bn liters (436,151 b/d).
On the other end of the spectrum, Archer Consulting sees the crop reaching just 586mn t and ethanol output declining to 24.55bn l.
Commodities specialists INTL FCStone said the increasing age of the industry's cane fields in the center-south, combined with irregular rains in the inter-harvest months of January and February, is likely to lead to a greater-than-expected decline in yields in the upcoming season, which it forecast to reach 588.8mn t.
This is expected to translate into a 3.1pc drop in ethanol output to 24.3bn l from the current season's expected output of 25.1bn l, FCStone said. It added that ethanol imports, principally from the US, were therefore likely to remain strong or increase.
On 24 February, data from Brazil's center-south cane industry association Unica indicated that the current crop would finish the season in the coming weeks at around 596-598mn t.
Debt-strapped mills have cut back on replanting schedules for their fields over the past years, which led to an overall increase in the age of the fields. Ideally, mills replant 18pc of their fields every year to maintain optimal yield-to-replanting metrics, but in tough financial times, they tend to cut back on replanting.
