There has been speculation for several months that Brazil might reduce its country-wide ethanol fuel requirement. This has now become official. Brazilian President Dilma Rousseff has announced that in an effort to subdue inflation, the ethanol mandate will be reduced from the current blend level of 25 percent to either 18 percent or 20 percent and the final decision on the blend level will be made before the end of the month. Implementation would occur in August. The action is a direct result of rising prices for sugar that have been caused by back-to-back lower than expected sugarcane harvests.

The Vancouver Sun published a quote from an anonymous source saying, “The effect of ethanol prices has been very negative for inflation and inflation expectations … and the President has decided to act.”

Fuel accounts for 2.5 percent of the weighting within the main IPCA price index and experts predict the reduction could ease inflationary pressure.

The sugarcane harvest is currently underway and it is not yet known what the final harvest numbers will be. Should they come in higher than expected, sugar mills may produce more sugar versus ethanol, or some may decide to produce the ethanol and export it to other markets including the U.S. Energy ministry officials are expected to meet tomorrow to discuss the potential consequences of reducing the ethanol blend.