Brazil’s Sugar Dominance and Ethanol Volatility: Navigating Oversupply Risks in a Shifting Market

Brazil’s sugar market remains a linchpin of global trade, with its 2025/26 production projected at 44.5 million metric tons (MMT) despite downward revisions due to drought and heat [1]. As the world’s largest producer, accounting for 24% of global output, Brazil’s decisions to allocate sugarcane to sugar or ethanol have profound implications for prices and trade flows. However, the interplay between ethanol price dynamics and sugar production risks is creating a complex landscape for investors.

Brazil’s Sugar Production and Oversupply Risks

The 2025/26 sugar crop is expected to near a record 44.5 MMT, driven by mills prioritizing sugar over ethanol amid favorable international prices [1]. This shift is partly offset by lower sugarcane yields, as Conab revised its estimate downward by 3.1% due to climate stressors [1]. Yet, Brazil’s dominance in the global market—projected to supply 24% of the 180.6 MMT global output—means even minor production adjustments could exacerbate oversupply risks. For context, India’s surplus production and weak monsoons have already tightened global sugar availability, but Brazil’s ability to pivot between sugar and ethanol remains a wildcard [2].

Ethanol Price Dynamics and Production Shifts

Ethanol markets in Brazil are undergoing structural changes. The government’s Fuel of the Future program, which raised gasoline blending mandates to 35%, has shifted demand toward anhydrous ethanol, potentially reducing hydrous ethanol supply by 1.2 billion liters [1]. Meanwhile, corn-based ethanol production has surged, now accounting for 22% of Brazil’s total ethanol output, driven by expanding infrastructure in the Center-West region [2].

Ethanol prices in Q1 2025 hit 743 USD/MT, but downward pressure emerged in February and March due to rising inventories and reduced hydrous ethanol demand [3]. The ethanol-gasoline price ratio—a critical metric for consumer and mill decisions—hovered near 73-74% in early 2025, just above the 70% threshold where ethanol becomes more attractive for flex-fuel vehicle (FFV) owners [4]. However, rising crude oil prices (forecasted at $90–95/barrel) could tip the balance, prompting mills to reallocate sugarcane to ethanol and reducing sugar output by 2–3 MMT [5].

Interplay Between Ethanol and Sugar Markets

The ethanol-sugar trade-off is intensifying. While sugar prices have surged due to global supply constraints, ethanol’s competitiveness is bolstered by policy incentives like Brazil’s RenovaBio carbon credit program, which rewards mills for biofuel production [2]. This duality creates a tug-of-war: higher ethanol blending mandates tighten the sugarcane supply-demand balance, while strong sugar prices incentivize mills to favor sugar.

For example, a 51% sugarcane allocation to sugar in 2025/26 assumes stable crude prices. If oil rises above $95/barrel, ethanol’s share could jump to 62–65%, squeezing sugar supplies further [5]. Companies like Adecoagro are already leveraging this volatility, flexibly adjusting production to capitalize on price differentials under Brazil’s E30 mandate [5].

Investment Implications

Investors must weigh several factors:
1. Oversupply Risks: Brazil’s ability to pivot sugarcane to ethanol could mitigate global oversupply, but climate shocks or policy shifts (e.g., higher blending mandates) could disrupt this balance.
2. Price Volatility: Ethanol’s sensitivity to crude prices and sugar’s exposure to global demand (e.g., India’s exports) create a volatile environment.
3. Policy Leverage: Government programs like RenovaBio and the EU-Mercosur ethanol quota could reshape trade flows and production incentives [1].

A key metric to monitor is the ethanol-gasoline price ratio. If it dips below 68.8%, ethanol demand could surge, forcing mills to reallocate resources and potentially driving sugar prices higher. Conversely, if crude prices stabilize and sugar demand weakens, Brazil’s sugar exports—already signaling a bullish turn—could dominate global markets [6].

Conclusion

Brazil’s sugar and ethanol markets are inextricably linked, with production decisions hinging on price ratios, policy, and climate. While the 2025/26 sugar crop appears robust, ethanol’s structural growth and policy tailwinds introduce uncertainty. Investors should prioritize companies with operational flexibility (e.g., mills capable of rapid ethanol-sugar shifts) and hedge against currency and commodity volatility. As the ARA hub emerges as a key ethanol export destination, Brazil’s role in both sugar and biofuel markets will remain pivotal, offering both risks and opportunities in a dynamic landscape.

Source:
[1] Sugar Prices Continue to Fall as Brazil Ramps Up ... [https://www.nasdaq.com/articles/sugar-prices-continue-fall-brazil-ramps-sugar-production-0]
[2] Ethanol Boom Drives Sharp Rise in Brazil's Corn Consumption [https://farmdocdaily.illinois.edu/2025/04/ethanol-boom-drives-sharp-rise-in-brazils-corn-consumption.html]
[3] Ethanol Price Index & Forecast 2025 | Latest Price Chart [https://www.imarcgroup.com/ethanol-pricing-report]
[4] Biofuel Dynamics in Brazil: Ethanol–Gasoline Price [https://www.mdpi.com/1996-1073/17/21/5265]
[5] Brazil's Sugar Exports Signal a Bullish Turn: Why 2025/26 ... [https://www.ainvest.com/news/brazil-sugar-exports-signal-bullish-turn-2025-26-sweet-spot-investors-2505/]
[6] Brazil Ethanol Market Share, Share & Opportunities 2025- ... [https://www.coherentmarketinsights.com/industry-reports/brazil-ethanol-market]