Global Commodities Forum

31 January - 1 February 2011

Sugar, Fuel Ethanol and Crude Oil Prices

by
Mr Lindsay Jolly, Senior Economist International Sugar Organization

"The views expressed are those of the author and do not necessarily reflect the views of UNCTAD"

GLOBAL COMMODITIES FORUM

Sugar, Fuel Ethanol and Crude Oil Prices

Mr Lindsay Jolly Senior Economist International Sugar Organization
International Sugar Organization

World Sugar Prices

V for Volatility?
International Sugar Organization

World Sugar Prices

V for Volatility? Volatility over the
past year the result of: Supply shortfalls tied to changing economic incentives, weather disruptions, and policy induced production cycles in several major Asian sugar producers.

V for Volatility?

International Sugar Organization

Sugar Price Volatility - Financialisation

Non-traditional
speculators have only financial motives and no interest or knowledge of the underlying commodities nor their delivery.
New-Age Speculators Inc.
I know nothing about sugar fundamentalsand I can prove it!

International Sugar Organization

World Sugar and Crude Oil Prices

W orl d S uga r , Cr ude O i l a nd Etha nol P ri ce s 160 140 120 USD/bbl 100 80 60 40 20 0
04 03 05 06 07 08 09 20 20 20 20 20 20 20 20 10
Cru de Oil - WTI: US D/b bl ICE No.11 in e th anol equ iv alent USD/m3

140 0 120 0 100 0 800 600 400 200 0 USD/m3

Broad correlation between sugar and crude oil. But periods of significant disconnect since 2007.
International Sugar Organization

World Crude Oil, Ethanol and Sugar Prices

World Sugar, Crude Oil and Ethanol Prices 160 140 120 USD/bbl 100 80 60 40 20 0 600 400 200 0
Crude Oil - WTI: USD/bbl Brazil anhy drous pric e USD/m3 US Ethanol price- USD/m 3 ICE No.11 in ethanol equivalent USD/m3

1400 1200 1000 800 USD/m3

20 03

20 04

20 05

20 07

20 08

20 09

International Sugar Organization

20 10

20 06

Correlation Annual Prices

Sugar Sugar Sugar Crude Oil Crude Oil
2001-2010

Crude Oil US Ethanol Brazilian Ethanol US Ethanol Brazil Ethanol

0.57 0.54 0.87 0.75 0.70

International Sugar Organization

World Crude Oil, Ethanol and Sugar Prices

Past Co-integration studies show: A causal chain running from crude
oil to ethanol and finally to sugar prices in Brazil; Increased volatility in crude oil markets results in increased volatility in ethanol markets . . an increase in ethanol prices volatility also impacts the sugar market.
Wor ld Sugar, Crude Oil and Et hanol Price s Crude Oil - WTI: USD/bbl Brazil anhydrous price USD/m3 160 US Ethanol price- USD/m3 ICE No.11 in ethanol equivalent USD/m3 140 120 100 USD/bbl 800 80 600 60 40 20 0
20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10

1400 1200 1000 USD/m3

400 200 0

International Sugar Organization

World Crude Oil, Ethanol and Sugar Prices

International Sugar Organization

World Fuel Ethanol

W orld Fue World Fuel Ethanoll Ethanol Production 100 90 80 70 60 50 40 30 20 10 0 USA Brazil Other

bln litres

20 02

20 03

20 04

20 05

20 06

20 0

20 0

20 0

20 1

20

20

International Sugar Organization

20

11

00

01

Fuel Ethanol World Fuel Ethanol

Fue l Eth ano l Prod uc tion ou ts ide Braz il and the US 6 5 4 3 2 1 0
nd na a EU li a a di ad ai la ra hi In an st C
2 008 2 010 e 2 009 2 011f

bln litres

bi a

a al te m Ar g en

Th

ol

om

Au

International Sugar Organization

ua

ti n

World Fuel Ethanol

World Fuel Ethanol Exports 6,000 Other 5,000 United States Europe (including re-exports) CBI Countries Brazil 4,000
4,000 6,000 Other Europe 5,000 United States via CBI United States duty paid World Fuel Ethanol Im ports

mln litres

3,000

mln litres

3,000

2,000

2,000

1,000

1,000

0 2003 2004 2005 2006 2007 2008 2009

0 2003 2004 2005 2006 2007 2008 2009

Arbitrage windows crucial. Brazil has lost to the US its position as the most competitive
International Sugar 2009. supplier to the global trade since November Organization

World Fuel Ethanol

E th a n o l P ric e s : US A a n d B R AZ IL e x p r e s s e d in US D
1 0 0 0 .0 0 U S C hi c a g o E th a n o l 9 0 0 .0 0 B ra zil E t h a n o l A n h yd ro u s

8 0 0 .0 0

P ric e i n U S D /

7 0 0 .0 0

6 0 0 .0 0

5 0 0 .0 0

4 0 0 .0 0

3 0 0 .0 0

2 0 0 .0 0
Y 2 ea 00 r 5 06 7 8 9 0 0 0 0 0 20 0 20 2 2 2 10

Arbitrage Window closes between Brazil and US

Due to saturated US market as approach E10 blend wall.

International Sugar Organization

World Fuel Ethanol

ETHANO L E U v s Bra z il E thanol P rice s e xpre ss ed in E UR
900

800

700

600 Pric e in EUR /m

500

400

300

200 EU T2 Brazil Anhydrous Brazil Anhydrous + Tariff 0

100

05

20

20

20

20

20

International Sugar Organization Arbitrage Window closes between Brazil and EU.

20

10

06

07

08

09

World Fuel Ethanol

E th a no l P ric e s : E U, US A , BR AZIL e x pre s s e d in US D
1 00 0 E U E thano l T 2 U S C hica go Ethano l 90 0 B ra zil Etha nol Anhyd ro us

80 0

Price in U S D /m3

70 0

60 0

50 0

40 0

30 0

6 8 0

20 0
Y 2 0e a 05r 07 00 00 09 20 20 2 2 2 01

US Ethanol is more competitive than Brazilian Ethanol

Arbitrage Window opens between US and the EU. US a more competitive supplier to world market. International Sugar Organization US production overcapacity exacerbated by the 10% blend wall.

Fuel Ethanol Prices and Drivers

Case Studies United States EU Brazil

International Sugar Organization

United States: blend wall blues

International Sugar Organization

US: RFS #2
US f uel et hanol production and consumption 60 50 40
bln gallons 25

Key components of the RFS

Renewable Advanced Cellulosic

20

30 20 1 0

15

10

0
2005 2006 2007 2008 20 09 2010e 2011f

0
20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20 20 21 20 22

consum ption

P roduction

International Sugar Organization

US Fuel Ethanol
US fue l e tha nol pric e s - m onthly - US D/ga llon 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00
01 4 7 20 00 20 02 20 03 20 05 20 06 20 08 20 09 20 0 20 0 20 1 20 0

S.F. Ch icag o Indi anap olis Ne w Y ork Ho uston Gul f

International Sugar Organization

United States: Confluence

RFS#2 RINS Blending Economics Gasoline Price EPA Blend Wall

Blend Credit

Ethanol demand <> RFS#2 mandate

Arbitrage Window Brazil/EU

Fuel Ethanol Prices

RFS#2 carbon footprint standards

Corn vs Ethanol Prices

Production

International

Capacity Utilisation Sugar Organization

US Fuel Ethanol
M onth ly Prices fo r Gasoline VS Ethan ol VS Cor n 19 98 - 2010 4 3.5 Gasoline/Ethanol Price USD/gallon 3 2.5 2 1.5 1 0.5 0
20 07 20 08 20 00 20 01 20 02 20 09 20 03 20 04 20 05 20 06 20 10

7 6 Corn - USD/bushell 5 4 3 2 1 0

YEAR
Etha no l f ob Gulf USD /ga llon Ga so line US Gulf Spo t Pric e (USD/ ga llon ) Co rn Cas h Price Mid We st (USD/bu sh el)

International Sugar Organization

US Fuel Ethanol
U n ite d St a t es : I N D E X E t h a n o l/ G a s o lin e /C o rn
7 6

In d e x V a l u e

03

00 4

08

20

20

20

20

20

Ye a r E th a n o l G a s o l in e Cor n G ULF

International Sugar Organization

01 0

00

00

March-June 2005 March-June 2005 March-June 2005

US Fuel Ethanol
4 3.5 3 2.5 y = 0.2365x + 1. 2781 2 1.5
March-June 2005 Feb May 2010

Ethano l-Gasoline Price Rela tionship s 2005-2010 In dex 2002= 1

May-July 2006

Ethanol Index

1 1.5 2.5 3.5 4.5 5.5 6.5

Gasolin e In dex

International Sugar Organization

US Fuel Ethanol
M o n th l y P r i c e s fo r E th a n ol V S Co rn 19 9 8 - 2 0 10 4 G a s o line / E t ha n ol P ri 3. 5 3 US D/ g allon 2. 5 2 1. 5 1 0. 5 0
00 07 09 3 4 08 2 06 00 20 20 20 20 20 20 20 20 20 20 10 01 0 0 05

7 6 5 4 3 2 1 0 C orn - US D/ b us h

YE AR
Etha n ol f o b G ulf US D/g a llo n Co rn Ca s h Pr ic e Mid We st ( US D/b u sh e l)

International Sugar Organization

US Fuel Ethanol
Et ha nol -Corn P ric e Re la t ionships 2 005 -20 10 Inde x 20 02 = 1 . 4

3.5

May-July 2006

E tha nol In de x

2.5

2 y = 0.2 009 x + 1.7 85 8 1.5

Jan-July 2005
1 1 1 .5 2
Co r n Ind ex

2.5

3 .5

International Sugar Organization

US Fuel Ethanol United States: RFS#2

Under the RFS#2, biofuels must: Achieve a certain level of GHG

emissions reduction, including iLUC; Be produced from a renewable biomass. Existing producers emissions are grandfathered.

International Sugar Organization

US Fuel Ethanol United States: RFS#2

In addition to conventional biofuels mandates (corn and cane ethanol can fulfill these mandates), there are also advanced biofuels mandates defined in RFS#2 Cane ethanol is eligible for advanced biofuels mandate, but not corn ethanol. Means US could be obliged to import Brazilian ethanol, to fulfill this mandate. Brazilian ethanol could gain a premium compared to corn ethanol. Brazils cane ethanol also qualifies under Californias LCFS but corn ethanol may not.
International Sugar Organization

EU: Fuel Ethanol

International Sugar Organization

EU : Consumption and Production

Ethanol production
France, Germany

forecast to reach 5.3 bln litres in 2011 (up 18%).

mln litres

EU Fuel Ethanol Consumption 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2005 2006 2007 2008 2009 2010 2011 Imports Production

EU countries

and UK will account for >50%.

mandating higher inclusion. E10 in Germany.

International Sugar Organization

EU Fuel Ethanol
E U F u e l E th a n o l P r ic e

1 4 00 1 2 00 1 0 00 8 00 6 00 4 00 2 00 0
06 07 08 9 00 20 20 20 2 2 01 0

T2 F ob R o tt e r d

E U R /t o n n e U S D /t o n n e

International Sugar Organization

EU: Confluence
RED Fuel Quality Directive

Member State NREAPs

E10 phase-in

Fuel Ethanol Demand

Arbitrage Window Brazil/US

Fuel Ethanol Prices

RED sustainability Criteria

Feedstock vs Ethanol Prices

Production

International Sugar Organization

Capacity Utilisation

EU Fuel Ethanol
E U E th a n o l P r ic e a n d F e e d s to c k C o s ts
700 T 2 fo b E t ha no l F e e d s to ck c o st (W h e a t) 300 650

600

250 E U R / to n n e F e e d W h e a t (G

550 f o b T 2 e th a

500

200

450

400

150

350

2005

2007

2008

2009

No correlation between EU ethanol and grain prices.

International Sugar Organization

2010

2 0 06

300

100

EU: Fuel Ethanol

E U a n d B r a z ilia n E t h a n o l P r ic e s : E U R / m 3
700 800

650

700

600

600 B razilian An hydro us Ethan o

550 EU T 2 Etha nol

500

500

400

450

300

400 EU T 2 B r a z i l A n h y d ro us

200

350

100

300

08

05

00

20

00

20

Typically a strong correlation between EU and Brazilian

prices. Because EU is a net importer (needs Organization International Sugar Brazilian/US ethanol).

20

20

10

Brazil: ethanol - sugar nexus

International Sugar Organization

Brazil Fuel Ethanol

.. Bulk of cane increase went to sugar production in 2009/10, but shared between sugar and ethanol in 2010/11.
Brazil: Annual Growth in Sugar and Ethanol Production

30 25 20 % 15 10 5 0 -5 Ethanol Sugar 2007/08 2008/09 2009/10 2010/11e 2011/12f

International Sugar Organization

Brazil: Sustainable Growth?

Brazil Sugar and Ethanol Production 40 35 30 20 25 20 15 10 10 5 5 0 0 15 bln litres Sug ar Ethanol 25 30

Brazil: su rcan prod ga e uction

70 0 60 0 50 0 M ton s ln ne
mln tonnes

40 0 30 0 20 0 10 0 0

90 /91 92 /93 94 /95 96 /97 98 /99 00 /01 02 /03 04 /05 06 /07 08 /09

98 /9 9

90 /9 1

96 /9 7

92 /

International Sugar Organization

94 /

06 /0 7

02 /0 3

04 /0 5

08 /0 9

00 /0 1

93

95

Brazil: Expanding FFV Fleet

Sale s of etha nol-fuele d and flex ifue l vehicles in Braz il
350000 300000
b illion lit r e

Br a z il - E th a n o l p ro d u cti o n
3 2 .0 2 8 .0 2 4 .0 2 0 .0 1 6 .0 1 2 .0 8 .0 4 .0 2 01 0 / 1 1e 2 0 11 / 1 2 f 2 00 2 / 0 3 2 0 0 0/ 0 1 2 0 0 3/ 0 4 2 0 05 / 0 6 2 0 0 6/ 0 7 2 0 08 / 0 9 2 0 0 9 /1 0 2 00 7 / 08 20 0 1 / 02 20 0 4 / 05 0 .0

250000 Units 200000 150000 100000 50000 0

-0 M 3 ar -0 M 4 ar -0 M 5 ar -0 M 6 ar -0 7 M ar -0 M 8 ar -0 M 9 ar -1 0

M ar

A nh y d ro u s

H y dr o u s

T ot a l

International Sugar Organization

BRL/litre 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 10/05/2002 10/11/2002 10/05/2003 10/11/2003 10/05/2004 10/11/2004 10/05/2005 10/11/2005 10/05/2006 10/11/2006 10/05/2007 10/11/2007 10/05/2008 10/11/2008 10/05/2009 10/11/2009 10/05/2010 10/11/2010 hydrous anhydrous Brazil - Wholesale ethanol prices, Centre/South

Brazil Fuel Ethanol

International Sugar Organization

Brazil: Confluence
FFV Fleet Fuel Ethanol Demand Hydrous vs Gasohol Price Anhydrous inclusion limit in gasohol (25%)

Relative Taxation CIDE PIS/COFINS

Fuel Ethanol Prices

Arbitrage Window US/EU

Ethanol vs Sugar

Fuel Ethanol Production

Sugarcane Price

International Sugar Organization

Brazil: Pump Prices

B r a z il R e t a il P u m p P r ic e s 2 .2 0

2 .0 0 B R L /l i t r e H y d r o u s

1 .8 0

1 .6 0

1 .4 0

1 .2 0 h y d r o u s e th a n o l 1 .0 0
6 7 8 9 0 0 0 0 0 0 0 0 2 2 2 2 2 0 1 0

G a s o h o l ( E th a n o l E q u i v )

International Sugar Organization

Brazil Pump Prices

Braz il: Hydrous Ethano l and Gasohol - Pum p Price s 2.70 2.65 2.60 Gas ohol 2.55 2.50 2.45 2.40 1.20 y = 0.1711x + 2.2503

1. 30

1.40

1.50

1.60

1.70

1.80

1.90

2.00

2.10

Hy drous Ethanol

International Sugar Organization

Brazil Fuel Ethanol

Bra zil : Sao Pa ul o Ca ne Price Vs Hydrous Etha nol Price 0.90 0.85 0.80 BRL/litre 0.75 0.70 0.65 0.60 0.55 0.50 150.00 200. 00 250.00 300. 00 350.00 400. 00 y = 0. 0019x + 0.2021

BRL/t onne

International Sugar Organization

World Fuel Ethanol

Brazil: Hydrous Etha nol vs Sugar Prices 35.00 30.00 US cents/lb 25.00 20.00 15.00 10.00 5.00 07/ 09/2010 07/09/2008 07/09/2009 07/09/2007 07/06/2007 07/06/2008 07/06/2009 07/06/2010 07/03/2007 07/12/2007 07/03/2008 07/12/2008 07/03/2009 07/12/2009 07/03/2010 Hydrous Ethanol: NY11 Equivalent Sugar: NY11

Sugar and Ethanol Prices become delinked.

International Sugar Organization

Understanding the Ethanol-Sugar Link

Price Arbitrage crucial to date. Brazil : long term most competitive supplier to the world market. US and EU Legislation creates significant demand for sugar cane ethanol (lower carbon footprint). Brazil is key to the worlds crude oil-ethanol- Organization International Sugar sugar nexus.

Understanding the Ethanol-Sugar Link

In Brazil, years of high global sugar prices see a

limited reallocation of cane away from ethanol. Brazils expanding FFV fleet makes global sugar supply potentially more flexible in the short term. Ethanol Sugar World sugar market may have to keep buying back ethanol from Brazils FFV fleet. Potential for Brazil to destabilise both ethanol and sugar markets via supply shock.

International Sugar Organization

World Fuel Ethanol

W or ld S u ga r , Cr ude O i l a nd Etha no l P r ic e s 160 140 120 100 800 80 600 60 40 20 0
04 06 07 9 05 03 08 20 20 20 20 20 20 20 0 20 10
Cr ude Oil - WTI: USD/b bl Br azil an hy dr ou s pr ice USD/m3 US Eth an ol p r ic e- USD/m3 ICE No .1 1 in eth an ol equ iva le nt US D/m3

140 0 120 0 100 0 US D/ m 3

US D/ bb l

400 200 0

Broad correlation between sugar, ethanol and crude oil. But periods of significant disconnect.
International Sugar Organization

Sugar Price Volatility

W orld S ugar P roduction and Consum ption - 1984 to 2009 170 160 150 140 130 120 110 100 90 80
160 140 120 100 USD /bbl 80 60 40 20 0
20 07 20 04 20 05 20 09 20 10 20 03 20 06 20 08

World Sugar, Crude Oil and Ethanol Prices

C rude Oil - W US TI: D/bbl IC N in ethanol equivalent U /m E o.11 SD 3

1400 1200 1000 USD /m3 800 600 400 200 0

million tonnes (raw value)

consumption production

1984 1987 1990 1993 1996 1999 2002 2005 2008

Volatility of Macro influences e.g exchange rates. Financialisation. Volatility of the fundamental analysis. Volatility in perceptions of the market fundamentals. Bull markets and high prices go hand in hand with huge volatility?
International Sugar Organization

Thank You!!

5-8 March 2011: 6th ISO/EGYPT Conference, ISIS Island Hotel, Aswan Egypt New Role for the World Sugar Economy in a Changed Political and Economic Environment 18 May 2011: 5th ISO/DATAGRO New York Sugar and Ethanol Conference Waldorf Astoria Hotel, New York

www.isosugar.org

International Sugar Organization