Brazilian sugar and ethanol companies are going into survival mode, cutting back harvest operations and tapping into credit lines to weather the slump in fuel demand caused by the coronavirus pandemic.
Government restrictions on movement and businesses to stem the spread of the virus have undercut global demand.
In Brazil, where most cars can run on gasoline or sugar-based ethanol, the fall-off has hit hard, with ripple effects across Latin America's largest economy.
The country is the world's No. 2 producer of ethanol behind the United States, with output of 35 billion liters (9.24 billion gallons) last year.
Ethanol sales in Brazil's top fuel consuming central-south region dropped 20% in the second half of March, according to sugar industry group Unica.
Given the downturn, some sugar companies have decided to delay harvest operations. Others are rushing to expand ethanol storage as mills tap additional, costlier credit lines and cut back on some crop care practices, which could hurt next year's cane production.
"We expect to sell only 30% or 40% of normal volume in April, and maybe 60% of normal in May," said Fabio Montechi, chief financial officer at Santa Isabel, a sugar company with two plants in Sao Paulo state that crush about 6 million tonnes of cane per year. The company is building an additional tank to store ethanol and is setting up a revolving credit line. Itau BBA, the investment bank controlled by Brazil's largest private bank Itau Unibanco Holdings, estimates that up to 30% of Brazilian sugar and ethanol companies are struggling financially and may have to halt operations.
"Every year, those mills with difficult capital conditions produce more ethanol at the harvest kick-off, to sell the fuel and raise cash to pay harvest costs," said Pedro Fernandes, agribusiness director for Itau BBA, adding that the drop in ethanol demand would hamper that business model. Hydrous ethanol prices are down by 31% this year in Sao Paulo state, according to the Cepea/Esalq research center, having fallen from 2.04 reais per liter to 1.39 reais per liter. Sugar prices touched a 1-1/2 year low this week as Brazilian mills shifted production from ethanol to sugar, boosting that supply.