Brazil may face additional corn supply as ethanol sector mulls force majeure

Brazil, one of the world's largest corn exporters, could face a greater-than-expected surplus of the grain over the coming weeks as reports emerge that ethanol producers are turning away feedstock supplies due to negative margins.

The global outlook for biofuels has rapidly deteriorated over the past month, with dozens of countries declaring transport restrictions in a bid to stop the spread of the coronavirus Covid-19. 

And with many new facilities in Brazil contracting domestic corn as a feedstock, reports are surfacing that some are shedding inventories and may declare force majeure on future supplies.

“Some of the ethanol plants are calling force majeure on purchased corn due to the reduction on demand because of the corona lockdown,” one Brazil-based market source said, with a second confirming that rumours are sweeping the domestic market.

The rumours, if true, would follow similar steps already taken by some players in the country’s largely sugarcane-based ethanol sector, as well as US-based ethanol producers, all of whom are wrestling with an unprecedented collapse in fuel demand.

Basis values for the new crop FOB Santos market are coming under pressure, as the trade expects any oversupply to head to the export market, with one market source estimating offers for October loading have already shed 10 cents on the news.   

Currently, demand for corn from the ethanol sector accounts for 4.5 million mt, although that is expected to rise to 9.1 million mt per year.

Much of the country’s corn-based ethanol capacity is based in Brazil’s biggest agricultural state, Mato Grosso, with the sector receiving huge investment in new capacity in recent months as Brazil rolled out a more ambitious biofuel policy, known as Renovabio, at the start of 2018.

Against that, Brazil’s domestic corn prices have so far raged higher and higher in recent months, as expected demand from the burgeoning ethanol sector dovetailed with a strong export campaign and growing feed demand from the country’s livestock sector.

Sao Paulo University’s Cepea agriculture economic department put domestic prices at BRL60.14 per 60kg bag (around $192.50/mt) on Tuesday – an all-time high, and an increase of over 56% on the same point of 2019, according to their data.

The twin dynamics of strong domestic prices and poor demand have already encouraged ethanol producers to sell corn out of their stocks in the hope that they can replenish them cheaply when the state’s huge safrinha harvest is gathered in just a few weeks time.

However, with the impact of slowdowns likely to hurt energy demand for a number of months, producers are thought to be mulling a declaration of force majeure in an effort to cancel contractual delivery obligations as well.

“They are getting rid of what they bought and force majeuring what they are about to receive,” the first market source said.

The rumours follow reports that the Shell and Cosan backed joint venture Raizen declared force majeure on some of its ethanol purchases recently, and wider reports that the country’s huge sugar-based ethanol capacity is struggling to adjust to the downturn in demand.

Brazil is expected to produce 35.5 billion litres of ethanol in 2019/20, 33.5 billion litres expected to come from sugarcane.

However, 1.69 billion litres is expected to come from corn with the volume increasing 114% on the previous year to take the corn-based contribution to almost 5% of the country’s ethanol production.

Some forecasts have expected corn production to grow to 8 billion litres by 2028, but the sector has been dealt a potentially devastating blow by the huge anticipated drop in demand because of coronavirus lockdowns.

“I know they are selling their stocks. This is lots of volume, Brazilian basis should go down,” the second source said.