Ethanol x Gas X SugarSome thoughts in Supply & Demand

Marcelo PierossiDRAFT VERSIO

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Economic Issues, Food & You - Coursera 2013

Journey Entry

10 - Relationship between ethanol and gasoline in Brazil reaches 71.73% (In portuguese)The article below is from an important brazilian newspaper and comments about the price relationship between ethanol for fueling vehicles and gasoline. In Brazil, we have the option to use both fuels, because our cars are flex fuel cars and are able to run with any mix of both fuels. But one issue important is that the energy content from ethanol is 70% of energy content of gasoline, so this ratio is the maximum value for using ethanol instead gasoline. And because ethanol is a agribusiness product with a large seasonal content, time of the year is other important issue in the equation: Ethanol or Gasoline?• What are the factors affecting this ratio?• This kind of relationship pushes towards market perfection? • How price is affected by supply and demand law?

http://economia.estadao.com.br/noticias/economia-geral,relacao-entre-etanol-e-gasolina-em-sp-atinge-7173,148563,0.htmDRAFT V

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© Marcelo Pierossi - 2013

Brazilian Sugarcane Production

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© Marcelo Pierossi - 2013

Brazilian Sugarcane Mills

Flexible operation: Sugar and Ethanol (from 40 to 60%)DRAFT VERSIO

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© Marcelo Pierossi - 2013

Production Mix

• Production defined by Prices• Sugar Prices – International Prices

• Ethanol Prices – Domestic Market Gas – competitor (every gas station has both) 70% of energy content compared with Gas

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© Marcelo Pierossi - 2013

Domestic Sugar S&D

Amortgui, H. - A PROSPECTIVE ANALYSIS OF BRAZILIAN BIOFUEL ECONOMY: LAND USE, INFRASTRUCTURE DEVELOPMENT AND FUEL PRICING POLICIES – UIUC, 2012

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© Marcelo Pierossi - 2013

Sugar International Market

World raw sugar price, ICE Contract 11

Jul-98 Apr-01 Jan-04 Oct-06 Jul-09 Apr-12 Dec-140.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00 C

en

ts p

er

po

un

d

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© Marcelo Pierossi - 2013

Sugar Domestic Market

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© Marcelo Pierossi - 2013

Flex Fuel Engines

• A flexible-fuel vehicle (FFV) or dual-fuel vehicle (colloquially called a flex-fuel vehicle) is an alternative fuel vehicle with an internal combustion engine designed to run on more than one fuel, usually gasoline blended with either ethanol or methanol fuel, and both fuels are stored in the same common tank.

• Modern flex-fuel engines are capable of burning any proportion of the resulting blend in the combustion chamber as fuel injection andspark timing are adjusted automatically according to the actual blend detected by electronic sensors.

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© Marcelo Pierossi - 2013

Flex Fuel Cars

• Evolution of the numbers of flex fuel cars in Brazil (a graph will be added)

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© Marcelo Pierossi - 2013

Domestic Ethanol S&D

Amortgui, H. - A PROSPECTIVE ANALYSIS OF BRAZILIAN BIOFUEL ECONOMY: LAND USE, INFRASTRUCTURE DEVELOPMENT AND FUEL PRICING POLICIES – UIUC, 2012

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© Marcelo Pierossi - 2013

Ethanol Domestic Market

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© Marcelo Pierossi - 2013

Gas Prices

Source: Financial Times 

http://www.ft.com/cms/s/0/00d4d8ee-8603-11e2-bed4-00144feabdc0.html#ixzz2SVwhAOwa

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© Marcelo Pierossi - 2013

Gas Prices

Source: Bloomberg

http://www.bloomberg.com/news/2013-01-17/petrobras-gasoline-price-rise-undecided-on-inflation.html

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© Marcelo Pierossi - 2013

Gas International Prices

Source: Petrobrashttp://www.petrobras.com.br/en/products/price-composition/DRAFT VERSIO

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© Marcelo Pierossi - 2013

Gasoline Market

• Importation

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© Marcelo Pierossi - 2013

Petrobras Market Value

Source : Bovespa DRAFT VERSIO

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© Marcelo Pierossi - 2013

Ethanol vs Gasoline vs Corn USA

Jan-

00

Aug-0

0

Mar

-01

Oct-0

1

May

-02

Dec-0

2

Jul-0

3

Feb-0

4

Sep-0

4

Apr-0

5

Nov-0

5

Jun-

06

Jan-

07

Aug-0

7

Mar

-08

Oct-0

8

May

-09

Dec-0

9

Jul-1

0

Feb-1

1

Sep-1

1

Apr-1

2

Nov-1

20.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

Corn $ / bu.

Ethanol $ / gal.

Gasoline $ / gal.

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© Marcelo Pierossi - 2013

Bankruptcy of sugar mills in Brazil

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© Marcelo Pierossi - 2013

Some remarks

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© Marcelo Pierossi - 2013

Conclusions

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© Marcelo Pierossi - 2013