Haxo Bioenergy

Renewable, Sustainable, Low Carbon Biofuels and Clean Energy Company

Ethanol - ETBE (Week Report)

ETHANOL – T2 prices have seen some deterioration, moving towards €530, while the T1 sector saw a sharp drop in prices this week – down from circa US$690 one week ago to US$635-660 FOB Rdam. The main culprit is an increase in offers/availability, and some players also suggest that significant amount of imports from the US could be unsold. EU producers however report that they are well-balanced and are seeing good demand. Generally lower grain prices should be keeping EU production economics in fairly good shape, even with T2 prices in the low €500s. Overall activity has been slow this week due to traders’ attendance at IP events in London and the Brazilian holiday period. The spread between T2 and T1 for denatured markets (plus €102 duties) remains pretty similar to last week, despite the drop in spot prices.

Ethanol - ETBE (Week Report)

ETHANOL – The picture this week is one of downward pressure across the board, with ethanol partly tracking the softening in energy prices. T1 prices surged through week to reach fresh record highs of US$720 on Thursday (eclipsing previous highs of US$715 in December 2008) - but values began to collapse on Tuesday, falling back to US$685-690. March T1 is heard well below that, at around US$640. The inflow of US material into Europe is one element having an effect on prices – perhaps earlier than some expected. Fresh offers of US material were heard this week – a tender to supply 35,000-50,000 cu m EN specs US origin ethanol for delivery March was out, with bids due in by close of business on Tuesday.

Ethanol - Latin America (Week Report)

LATIN America – Domestic hydrous prices have eased in CS Brazil in recent days after buyers pulled back from the market to re-assess their stocks. Hydrous values have now dropped back into a bid/offer range of R$1,340-1,360/cu m ex-mill Ribeirao Preto and some smaller volumes traded within that range yesterday. Yesterday’s values are about R$100/cu m off those of last week. Some finer weather in CS Brazil during late January and early February may be boosting supplies from those mills that decided to crush through the inter-harvest period and lower values could also be reflecting the impact on demand of higher prices for hydrous. Anhydrous offers have slipped R$40/cu m to R$1,360-1,370/cu m and are now offered at slightly higher prices than hydrous for the first time since the start of the year. A weaker Real and the softer domestic market values have helped lower export offers but bids have also followed the market lower. Hydrous ANP is currently assessed in a notional bid/offer range of $580-720/cu m FOB Santos, down $20/cu m on either end of the range. Indicative Anhydrous ANP values have fallen by the same margin and are now pegged in a $590-805/cu m FOB Santos band. Our assessments of offers for EU Grade Anhydrous have dropped $30/cu m to $820/cu m but bids have dropped $40/cu m to $730/cu m.

Ethanol - ETBE (Week Report)


ETHANOL – T1 prices have had a choppy week, moving down into the US$660s late last week, but rising to US$690 on Monday and breaking the US$700 barrier on Tuesday. T2 Rdam activity has been quiet in recent days, with €570 still offered but no firm bids heard, while ely March offer ideas are lower at €555. Notional buy interest is pegged at €550. The rise in T1 as well as the Euro’s recent weakness against the US dollar in the past week has put T2 firmly back into competitive territory versus T1 values for denatured markets (T1 plus €102/cu m import duties).

Ethanol - Understanding the Market and Prices

A key feature of commodities is their uncontrolled price fluctuations. Except in the case of petroleum products –– which in Brazil are a monopoly with government-controlled prices –– all other commodities suffer from permanent price volatility.

This is the case with fuel ethanol, where prices fluctuate freely with changes in supply and demand. It is true that in the past, the Brazilian government controlled the prices of sugar, ethanol and many other commodities. However, there is broad consensus that deregulation in the 1990s produced significant efficiency gains and production cost reductions that benefit all consumers.

Following the rapid growth of flex-fuel vehicles since 2003, which now account for almost 40% of the total car fleet, ethanol surpassed gasoline in consumer preference and became a remarkable example of a successful effort to replace oil dependency and combat global warming. In the past three years, thanks to the expansion of ethanol production and competitive prices, combined with the recognized environmental value of the fuel, ethanol consumption grew 78%, compared to only 3% for gasoline.

Confirming the rule of volatility, certain specific factors led to an increase in ethanol prices near the end of the current sugarcane harvest. The first factor, which has been widely reported but not clearly explained, is the global rise in sugar prices caused by poor harvests in key producing countries, among them the top two producers in the world, Brazil and India. In fact, Brazilian sugarcane mills have some flexibility between producing sugar or ethanol, but this “migration” is limited by the absence of sugar factories in most new units and a lack of spare capacity in older ones.

Although it hit the industry hard, the key factor driving high ethanol prices in Brazil –– the global financial crisis –– has received little attention. In the first half of 2009, a lack of liquidity in the credit market and high debt levels forced many sugarcane mills to flood the market with large amounts of ethanol at depressed prices just to maintain cash flow. These low prices led consumption to increase by nearly 30% over the same period in 2008, an extraordinary level in the fuels market. Then, excessive rains in the second half of 2009 caused mills to stop processing sugarcane for twice the usual period, compromising projected production and stocks of ethanol for the inter-harvest period, which lasts from December to April.

One could argue that ethanol is today an example of well functioning market forces generating price adjustments. The main pillar of this system is the flex-fuel vehicle, which allows consumers to choose their fuel at the pump according to price and environmental benefits. No country in the world offers this choice in such broad and attractive terms for consumers. In making fuel choices, the drivers of flex-fuel vehicles lead markets to adjust. Therefore, the Brazilian experience is a national technological success, from the competitiveness of sugarcane as a feedstock for ethanol to the efficiency of flex-fuel engines that allow market-based price formation to produce economic, social, environmental and public health benefits.

However, in at least two vital areas improvements are on the way. First, credit availability is going to help in the creation of market-regulating stocks, a feature that did not produce the necessary results in 2009 because of weak corporate balance sheets and a lack of credit availability. Second, the recent decision by the Brazilian Petroleum, Natural Gas, and Biofuels Agency (ANP, in Portuguese) to allow ethanol trading companies to operate in the fuels market, a path until now unfortunately forbidden by existing rules, should improve the way the market functions. Price volatility will continue to exist, because unlike oil, sugarcane production depends on Mother Nature. However, volatility can decrease with the presence of new agents and financing, storage and trading mechanisms.

Another important variable is foreign trade. The Brazilian government and industry are engaged in a broad campaign to consolidate ethanol as a global commodity. This could bring additional investments, jobs, foreign exchange earnings and gains for the planet in terms of climate change. The problem is that the ethanol market is highly protected around the world. The United States is beginning to recognize the benefits of sugarcane ethanol in comparison to other feedstocks, and the tariff it levies on imported ethanol is currently being debated by the U.S. Congress and could be dropped at the end of the year.

If we want to consolidate ethanol as a global energy alternative, it is essential that tariff and non-tariff protection barriers be eliminated, including those imposed by Brazil, which has its own 20% duty on imported ethanol – a move that has been the subject of considerable criticism abroad. Some groups in the U.S. correctly argue that it is incoherent for Brazil to ask for greater trade liberalization and at the same time protect its own market with a high import tariff. Free trade is not a one-way street. If Brazil has the most competitive ethanol industry in the world, why not set the good example that entitles us to call for the opening of the North American market, by far the largest consumer market today?

In summary, ethanol’s 35-year old history has been a bumpy one: from intervention to free market, the development of ethanol-only vehicles, back to gasoline-powered cars, to the innovation of flex-fuel vehicles. Today we have motorcycles, bioelectricity and bioplastics. In the future, we see buses, trucks, airplanes, cane-based chemicals and hydrocarbons. Despite this year’s hiccup, caused by the financial crisis and the weather, it is essential to continuously improve market conditions and stimulate technological change, competitiveness and sustainability.

Ethanol ETBE (Week Report)

ETHANOL – The T1 sector has come under downward pressure in recent days, with spot booked close to US$675 on Monday but with offersrs slipping to the US$660s/cu m on Tuesday, matched by a lack of bids. T2 markets are fairly steady but bids have also thinned out in recent days, while offers dropped to €570 on Tuesday. We have seen some ongoing price discussions for US material and heard that several shipments have been booked, including a 10,000 mt early February shipment for ARA (with Finland rumoured as a possible alternative destination), as well as a 4,000 mt late January shipment, due also for Rotterdam. A new source of T2 status ethanol is on the market, with Sudan due to deliver its first export cargo of ethanol to Europe in January. More availability is anticipated in the coming months.

Pre-salt: What now?

This event marked an important moment for the Brazilian oil industry, because recent discoveries in the world oil scene have been rare and also because Brazil has always carried the title of eternal latecomer in the race for oil. The Brazilian oil industry was, until then, a classic case of sudden success but with limited potential.

So when their country arrived on the pre-salt scene, Brazilians began to dream of fabulous trajectories of economic development financed by the excessive reserves that surely rested under the water, just waiting to be converted to a new “oil El Dorado.” Brazil would enter the select club of oil exporting countries, and the benefits of being part of this club would be many, including the possibility of obtaining abundant oil rents and participating in OPEC.

But the entry into that club would not be without costs. First, because inevitably the process is slowed by the technological difficulties of producing oil, no matter how abundant, at a depth of several thousand meters and in some places more than 200 miles offshore. Second, because it remains unknown in which direction the world energy grid will go and so it is unclear whether Brazil could recoup the hundreds of billions of dollars spent on pre-salt exploration and production. And certainly in many countries oil hasn’t been the blessing to the economy that one would expect. Many countries that export oil or other natural resources have in the past suffered from “Dutch disease,” when the inflow of foreign currency raises the exchange rate and makes the rest of the economy less competitive. This is true in Venezuela and could easily be the case in Rio de Janeiro, which has experienced a downward economic trend since it ceased to be the nation’s capital 60 years ago. (To mitigate these risks, a series of measures such as taxes on imports or funds of oil reserves would need to be adopted.) Finally, there is the high political cost that the discussion at the federal regulatory level invariably brings to a country like Brazil, where often the direction of the economy is decided behind the scenes and does not always follow the most honest negotiation procedures.

Clearly, mere entry into the “oil club” would not magically yield economic development. On the contrary, it would be a long and arduous road. It was surely in this context of elevated costs that the prospect of pre-salt was discussed, and on Monday the 31st of August 2009, after two years of heated debate, the governor of Brazil announced his proposal to manage pre-salt oil. The proposal includes changing the regulatory framework from the current model to concessions for a shared model—one in which the state owns the reserves and the operator pays a portion for the oil produced. This would entail the creation of Petrobras—a state enterprise like the Norwegian Petoro—to manage these shared contracts and decide who would produce in partnership with the state. Additionally, a a portion of the state oil income would be reinvested into social issues, thus acting as a driving force behind the so dreamed of social economic development promised by the “oil El Dorado.” The general consensus is that the government’s proposal has some major structural defects and needs to be revisited and reworked—up until a certain point, that is, and in political terms, that clearly implies an election.

To evaluate how this proposal will impact the future of investments in the Brazilian oil chain, it is necessary to discount the ills of the political game and the hiss of the major international oil companies until the new regulatory model will in fact be the regulatory framework of the pre-salt. It is too early to say how these investments will turn out, as we are still in the second step of a long journey that must precede any true financial results.

Being that this is a long horizon, it is interesting to think in the meantime about the half-life of economic investment in post-salt oil and also about the alternative sources in Brazil—yes, Brazil possesses fantastic renewable resources—and will continue to provide good alternative investment opportunities.

Agribusiness Opportunity in Latin America

Latin America is home to hundreds of farming cooperatives and small regional growers associations.   Often these cooperatives and associations are home to as much competition as cooperation.  This represents a challenge when growers seek access to export markets for their produce.  It also represents an opportunity for development that will create sustainable growth in the agribusiness sector. 

Mexico’s proximity to the USA, coupled with its climate and the availability of low-cost farm labor, make it a logical source for meeting growing fruit and vegetable consumption in the USA.   The value of U.S. agricultural imports from Mexico is roughly equal to the value of U.S. agricultural imports from all S. American countries combined.  (Source:  USDA Market News)

Orange Case Study

Development banks are willing to invest in infrastructure to support export market development for agribusinesses.  Nacional Financiera, S.N.C. is currently working on such a project with Mangazo SA de CV for exporting oranges from Mexico’s Baja California Sur.   This orange project provides a good template for considering opportunities across Mexico. BCS growers are selling their oranges domestically rather than exporting them to the USA where willing markets await with citrus prices ten times higher than Mexico’s.

In order to take advantage of this attractive price multiple, small growers in the region need to cooperate and invest collectively.   They need more than physical infrastructure such as a USDA-certified packing shed with cooling and sorting equipment and country-of-origin labels with the proper price look (PLU) numbers and bar codes used by retailers in the USA and other countries.

Exporters also need marketing representatives in export markets to plan promotions with retail merchandisers, point-of-sale materials, pricing quotations to be provided five weeks in advance to retail buyers along with volume and sizing forecasts, steady supply through the entire season, reliable freight providers to deliver on-time, and analysis to ensure the produce arrives at the retailer’s warehouse with the desired shelf life for distribution to stores.

Mango Case Study

With the proper physical and professional infrastructure, export programs have been very profitable.  A case study which provides valuable insights into agricultural exports opportunities in Mexico is the mango crop.  Prior to Nafta, mangos were exported to the USA through produce brokers in Florida, Texas, Arizona and California.   These produce brokers maximized the price to retailers, minimized the return to growers, and pocketed a very hefty profit given their minimal value added.

In 1994 a program was implemented by International Market Resources with Mexico’s largest mango grower, Agroproducto Diazteca SA de CV of Sinaloa.  This was the first time retailers in the USA imported mangos directly from the grower.  Within eight years, annual sales for this single grower increased 400% and 80% of the company’s crop was sold directly to retailers in the USA.  By eliminating the middlemen, the grower was able to increase profitability, project consistent growth, and decrease bad debt expenses.

The opportunity is realized when growers are given the tools to manage export sales.  This involves retaining marketing representatives rather than brokers so that control rests with the growers, creating relationships with USDA staff and third party certification agencies, building relationships with retail procurement professionals for planning future yields, pricing, and varieties, investments in an export packing facility, and implementation of  phytosanitary measures from the orchards and fields through final delivery to customers.

Success Stories

The Fresh Produce Association of the Americas is a bi-national organization based in Nogales, Arizona which has benefitted many growers and crops in Mexico.  It success stories include beans, bell peppers, chilies, cucumbers, eggplants, grapes, limes, mangos, melons, squash, and tomatoes. The majority of fresh produce consumed during winter in the western USA comes from Mexico through Nogales, Arizona.

Some of these commodities, like tomatoes, benefit from economies of scale enjoyed by large multinational companies.  Some commodities are still distributed primarily through produce brokers at the border.   More growers are setting up their own distribution operations in the USA.   However, many opportunities remain for regional grower cooperatives and associations to develop export markets on behalf of their members.

Organics

One of the most promising areas for is organic produce.  In Latin America, Uruguay has the highest percentage of organic farm land – much of it in urban areas. But Uruguay is not close enough to the USA to maintain a low carbon footprint for agricultural exports. Organic consumers are very interested in regionally produced foods.

In 2000 Mexico placed 16th in the world and fifth in Latin America for organic land under production. Unfortunately, Argentina’s 3 million hectares certified organic includes unmanaged range land, so the statistic is misleading. “The value of organic production in 2000 was $150 million from Mexico, five times greater than Argentina’s, which puts Mexico second only to Brazil in total value of organic production in Latin America”, according to agriculture researcher Don Lotter from Davis, California.

Mexico’s domestic demand is still small; however, the value of organic production in Mexico is expanding at twice the rate of the USA’s. Coffee is Mexico’s largest organic crop. Buying organic coffee from Latin America helps small rural growers more than most foods you can buy. “Over 50,000 small farmers, with an average holding of 2 hectares produce over two-thirds of organic production value in Mexico. Since it is far beyond the abilities of a producer of that size to seek individual certification, certification is done by farmer groups and cooperatives”, states Lotter. 

The Opportunity

The opportunity exists for investors in regional grower cooperatives and associations to provide the infrastructure and professional development required to build export sales directly to Fortune 100 retailers and quality wholesalers in the USA.   With the proper infrastructure and marketing, growers in Mexico can create profitable long-term relationships with the organizations that retail fresh produce in the USA.

 

Sugar Price

KDP Raws FOB: $ 609.00
KDP C&F Black Sea: $ 654.00
KDP Whites FOB: $ 719.00

Ethanol - ETBE (Week Report)

ETHANOL – Both T1 and T2 markets made healthy gains this week, thanks to growing buying interest and tighter prompt markets. Interestingly, T1 moved into contango territory on Tuesday – with US$689 FOB Rdam booked for prompt Jan delivery, while US$690 traded for February tonnes. T1 prices seem to be heading back in the direction of the record highs of US$710-715 seen in December ‘09 and previously in September ’08. The closure of the Brazilian arbitrage, strong domestic Brazilian prices and surging replacement values are supporting a stronger T1 sector – despite Brazil’s blend reduction announced this week and also in spite of apparently constant ongoing discussions/offers of US material, an alternative source of T1, for the EU market. Some expect the first significant US volumes could come to Europe in February, but, as yet, little or no product has been confirmed booked to EU end-users. Poorer GHG ratings for US corn-based ethanol (compared to Brazilian cane and other origin ethanol) are cited as one of the key remaining potential impediments for European buyers. US producers are otherwise deemed able to produce to EU specs and meet other sustainability criteria.