Brazil's Unpopular Fuel Policy Means Sugar Faces Vote Threat

by Isis Almeida and Fabiana Batista (Bloomberg Quint) ... (Luis) Matos is one of millions of Brazilians who have cut back on car use after fuel costs climbed to a record. Like many in Latin America’s biggest economy, he’s also struggling to adapt to daily swings at the pump after state-run oil company Petrobras ended a decade of gasoline price caps.

That move aligned domestic gasoline prices with the international oil market. It also leveled the playing field for ethanol. Most Brazilian motorists drive flex-fuel cars that can run on ethanol or a mixture of gasoline and the biofuel.

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Unpopular Policy

The new policy has brought cheer to Brazil’s embattled sugar industry, the world’s largest, which produces ethanol from sugar-cane. But overall it has proved to be unpopular in a country where the population is almost entirely reliant on road transportation, and where 21 percent of workers don’t make the minimum monthly wage of 954 reais ($253).

Changes may be afoot after October’s presidential election. The leading candidate in the most recent polls, Jair Bolsonaro, says Brazil needs to review Petrobras’s monopoly. Pro-environment candidate Marina Silva, currently in second place, says fuel prices shouldn’t be adjusted daily. Ciro Gomes, the leftist candidate in third place, wants to limit the company’s profit margins.

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The debate comes just as the end to gasoline caps had boosted demand for ethanol and improved the outlook for the industry. Consumption rose 41 percent this year through April, a two-year high, according to oil regulator ANP. Ethanol plants are now selling the biofuel at prices 20 percent higher than a year ago. Ethanol is very competitive against gasoline in most Brazilian states, said Nick Penney, a senior trader at London-based futures and options brokerage Sucden Financial.

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A return to gasoline price controls would be dire news for Brazilian sugar producers. While higher ethanol demand has helped, they’re still struggling with sugar prices that are near the lowest in a decade.

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Apart from the possible change in fuel policy, Brazil’s Senate approved legislation that will allow millers to bypass distributors and sell ethanol directly to fuel retailers in a bid to lower prices. That could undermine RenovaBio, a program that’s designed to boost production and consumption of biofuels and was welcomed by the industry.

The strike by truck drivers that paralyzed Brazil last month has already given the sugar industry a taste of how public opinion can lead to quick changes in policy. To stem the protests, the government intervened to cut diesel prices, while Pedro Parente, the Petrobras chief who introduced the market-friendly fuel policy, resigned. READ MORE