It says it hopes to reduce price risk for participants in Brazil’s ethanol market, one of Latin America’s most active sectors.
Prices will be formed using the Ethanol Hydrated Price Indicator, calculated by the Research Centre for Applied Economics (CEPEA) of the Luiz de Queiroz School of Agriculture (ESALQ) at the University of São Paulo, based in Paulínia, the country’s largest fuel distribution hub.
The bourse hopes ethanol mills and distributors of the fuel will trade the contracts and that cash settlement will enable broader market participation. It will allow arbitrage between the physical and futures markets and leave the market open to individual investors, banks and foreign investors.
Brazil is the world’s largest ethanol producer. A research paper released this morning (May 11) by London-based sugar merchant Czarnikow suggested Brazil was heading for a record sugar harvest in 2010, with an expected 590m tonnes of cane set to be crushed.
The record crush is expected to raise sugar production to 33.5m tonnes, an increase of 17% on 2009, when the crop was hit by poor weather conditions. The global fall in sugar prices of almost 60% since February has opened up the potential for significant growth in the ethanol market, Czarnikow suggests.
It says it expects domestic ethanol demand to grow by at least 3.5bn litres, or around 15%, this year, driven largely by increased flex-fuel car use. Brazil’s public transport infrastructure lags behind other developed nations, and the vast majority of its inhabitants use road transport.
However, the merchant cautioned that today’s prices mean it is uneconomical for farmers to grow sugar. It added that the sector has found it more difficult to access capital since the financial crisis and that several sugar mills have defaulted.
Toby Cohen, head of analysis at Czarnikow, said in a statement : “The start of crushing [sugar cane] in Brazil is always a pivotal time in the sugar market, and especially so this year following the shortfall in supply during the previous season. Although we are heading for a record 590m tonnes, the poorer earnings will have far-reaching consequences, as the market is now back to levels that do not support growth.”
Tom Osborn +44 207 779 8361 tosborn@fow.com