Brazil to focus state loans on ethanol, not sugar

Brazil’s government plans to prioritize state lending for cane mills that focus on ethanol rather than sugar in a bid to boost supply and stabilize prices for consumers, Energy Minister Edison Lobao said Friday.

The high international cost of sugar has led Brazilian millers to reduce output of the biofuel, aggravating the usual seasonal rise in ethanol price at a time when policy-makers are increasingly concerned about inflation.

“We’re taking a series of measures to ensure the supply of ethanol for consumers in Brazil. Among these measures is giving priority to loans to those that actually produce ethanol,” Lobao said during a televised broadcast. “The key objective for state financing (to the sector) is without a doubt ethanol.”

Brazilian newspaper Folha de S.Paulo reported on Friday that the government would restrict loans to millers that produce sugar, without saying where it obtained the information. The paper also said the government was studying a potential tax of 4 to 5 percent on sugar exports and plans to exempt a specific tax on imported gasoline.

Lobao said he has asked state oil company Petrobras (PETR4.SA), already the country’s fourth-largest ethanol producer, to become more involved in biofuels production to help boost supply and reduce price volatility.

On Wednesday, the country’s oil regulator, ANP, said it was considering treating ethanol as a “strategic fuel” rather than an agricultural commodity, part of broader efforts to tighten government regulation over the sector. [ID:nN06254583]

Complaints by consumers about ethanol prices — as well as threats by politicians — are common at this time of year because the sugar cane season is not yet in full swing and ethanol prices rise tend to rise in between harvests.

The biofuels sector has also cut investments in expansion since the 2008 global financial crisis, leaving production lagging behind the country’s soaring fuel demand.

Political leaders have in the past made threats to create a sugar export tax without acting on them. Some analysts question the likelihood of such a move at a time when Brazil’s trade surplus is shrinking.

Fuel prices are a particular worry for the government, with ethanol prices at their highest level in five years in nominal terms in late March. Gasoline demand is also peaking as drivers switch away from ethanol as prices rise.

Brazil’s adoption of flex-fuel cars that can run on any combination of gasoline and ethanol has helped spur its domestic biofuels industry, but also means prices at the pump can vary widely depending on weather and crop conditions.

A long-term solution to the problem will likely require greater storage capacity to stabilize prices between harvests.