Brazilian sugarcane producers to benefit from higher ethanol demand, RenovaBio programme in 2020

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An increase in ethanol consumption and the implementation in 2020 of the RenovaBio federal programme to cut carbon emissions is expected to benefit Brazil’s sugarcane industry, according to a recent report from Moody’s Investors Service.

Brazil’s federal RenovaBio programme aims to cut carbon emissions by 10% in 2028, in line with the Paris Agreement on climate change, and is due to enter force in the country next year.

"Domestic demand favoured by RenovaBio will be the main driver for the industry growth," said Erick Rodrigues, vice-president and senior analyst at Moody’s. "The economic incentive provided by RenovaBio will help with a resumption of investments in the sugar-ethanol sector allowing Brazil to recuperate crushing levels which have been stagnated in the last few years.”

Under RenovaBio, tradeable carbon credits known as CBios, will be granted to certified producers generating an extra revenue source. On the other hand, fuel distributors will meet their annual carbon emission reduction targets through the purchase of CBios.

Similar to the Renewable Identification Number (RIN) in the US, CBio is a tradeable certificate; one CBio corresponds to a reduction of one tonne of carbon dioxide equivalent, when compared to fossil fuel emissions.

At the same time, Moody’s notes, ethanol margins have become increasingly sensitive to fluctuations in the price of oil. The correlation between international oil prices and Brazilian ethanol prices has increased since 2017, after domestic gasoline prices began to incorporate more periodically the changes in import parity.

However, Brazil's low production cost helps local ethanol production to remain competitive even under stressed oil prices.

The report noted that large sugarcane producers Raízen, Adecoagro and São Martinho are set to benefit from the increase in demand for ethanol, moving into 2020.