Peak harvest ethanol production has started to hamper domestic prices in the key Center-South region of Brazil, despite estimated demand for hydrous ethanol of around 2 billion liters in September. 

The extra ethanol production exceeded the available storage space limits and multiple mills in many regions were aggressively selling on Thursday. 
S&P Global Platts assessed hydrous ethanol ex-mill Ribeirao Preto, including taxes, at Real 2,070/cu m ($508.42/cu m) on Thursday, a drop of 3.72% or Real 80/cu m from August 12. The Platts anhydrous ex-mill Ribeirao Preto price has dropped even more and was assessed at Real 1,970/cu m Thursday, down 4.60% from Real 2,065/cu m a month earlier. 

The domestic spot anhydrous ethanol assessment was at an 8.15% premium to hydrous ethanol Thursday, 2% below the average premium for long-term contracts. 

"Storage capacity will be a continuing problem for mills during September and October because of the peak ethanol production, but capacity restraints should subside post-October when the harvest starts to wind down and ethanol production decreases," a Sao Paulo-based broker said. 

In 2018, when hydrous ethanol inventories at the end of July totaled 5.24 billion liters, according to Brazil's Ministry of Agriculture and Livestock (MAPA), the selling pressure was minimized as mills -- in a carry strategy -- rented tanks to those that could not store all their production due to financial constraints. 

In 2019, however, even with hydrous ethanol stocks recorded by MAPA at 3.73 billion liters, or roughly 29% below than the same point a year earlier, the lack of storage capacity seems to be worse than in 2018. 

One possible reason for this reduced capacity, despite the lower stocks level, could be that more mills have been encouraged to increase the size of their carry strategies in a bid to make greater profits in the fourth quarter of 2019 and first quarter of 2020, when domestic prices historically spike. 

In addition, the weather has been very dry during the first two weeks of September with no delays in production. The dry weather is also causing sugarcane's total recoverable sugar (ATR) levels to be very high, which in turn means elevated ethanol production from the crop. 

Distributors who restocked during the first few days of September have since been absent from the market, meaning the excess of supply and inadequate storage capacity is not being alleviated. 

As the average days in storage capacity for distributors is seven to 10 days, the market would expect increased distributor buying to occur in the coming days. 

"Depressed sugar prices are convincing mills to remain at maximum ethanol production to take advantage of more favorable ethanol prices." a Sao Paulo-based trader said. 

The front-month October NY11 sugar futures contract settled Thursday at a 2.16 cents/lb discount to hydrous ethanol, in raw sugar equivalent. This would help flex mills to continue maximizing their ethanol to sugar production to take advantage of the favorable pricing toward ethanol, sources said.