SAFRAS & Mercado observed that the physical hydrous ethanol market ended the first half of August with a strong upward price movement in Brazil's Center-South, clearly heading toward the R$3.00 per liter level (approximately US$0.58 per liter).

This assessment is consistent and, most importantly, helps distinguish the recent rise in hydrous ethanol prices from a potential structural change in market fundamentals. What has emerged is a market that shifted from excessive caution among distributors to a temporary scramble for available supply, while mills have yet to fully respond. The key point is that this firmness does not necessarily mean the market has entered a sustained upward price cycle.

Inventory Rebuilding Drives Demand

The movement began on the demand and inventory-rebuilding side. With mills allocating a larger share of their production mix to sugar amid the commodity's appreciation, hydrous ethanol availability became more restricted.

At the same time, distributors had been operating with low inventories and making purchases very close to their immediate requirements, partly because of concerns that prices could continue to decline.

When Raízen Distribuidora increased its buying appetite, it acted as a trigger in a market that was already physically tighter. From that point onward, other distributors realized almost simultaneously that they needed to rebuild inventories, but they encountered a very different market from the one they had expected just a few days earlier: lower supply, firmer mills and rising prices.

The return to school is also relevant in this process. The resumption of the school calendar, first in the public school system and later in private schools, tends to increase vehicle traffic and, consequently, fuel consumption.

Not all of the acceleration in demand can be attributed to this factor, but it helps explain why the need for product emerged precisely toward the end of July, when the market was still operating with relatively lean inventories. The result was a kind of race to replenish stocks: those who moved early were able to buy, while those who remained out of the market ultimately had to pay higher prices.

Delayed Crushing and Supply That Has Yet to Respond

On the supply side, however, there is an important particularity. A survey conducted among 15 mills indicates that sugarcane crushing is running behind schedule, despite the greater concentration of the production mix in sugar.

Lower TRS (Total Recoverable Sugar), associated with recent rainfall, is also limiting the ability to maximize sugar production. This creates a particular situation: mills want to prioritize sugar, but the lower industrial quality of the sugarcane prevents them from taking that strategy to its limit. As a result, a larger share of the raw material ends up being converted into ethanol.

However, this additional product has not yet been sufficient to generate the inventory pressure that would normally be expected in July and August.

This is probably the central point for interpreting the coming weeks. The market remains firm because demand arrived before supply was able to fully respond. As long as distributors continue rebuilding inventories, mills will retain greater bargaining power and the market is likely to remain supported, with the possibility of further price increases.

Whether hydrous ethanol approaches or even tests the R$3.00 per liter level (around US$0.58 per liter) will depend less on a structural change in the market than on the intensity and duration of this inventory rebuilding process.

The Market Could Shift Once Distributors Are Fully Supplied

There is, however, a fairly clear limit to this movement. As distributors rebuild inventories to levels considered comfortable, the urgency to buy will diminish.

At the same time, sugarcane crushing should gain momentum, provided weather conditions allow, gradually increasing the physical availability of ethanol.

At that point, the balance of power could reverse: distributors would stop competing for product, while mills would begin competing for room to sell. This could mark the beginning of a period of greater commercial pressure and a correction in prices.

The August export line-up adds another important variable. Some mills are committed to these shipments, temporarily reducing the volume available for the domestic market. Ethanol loading and unloading volumes are updated weekly by SAFRAS & Mercado on its platform.

This situation helps support prices in the short term, but it does not eliminate the underlying issue: a significant amount of sugarcane remains available for processing.

The estimate of approximately 650 million metric tons for the crop reinforces the perception that the potential supply of raw material remains high. If weather conditions permit, crushing should continue through December, and some units may even need to continue processing sugarcane through the end of the season.

September and October Come Into Focus

For that reason, the period requiring the greatest attention appears to lie further ahead. July and August did not generate the inventory pressure the market had expected, but that does not mean it has disappeared. It may simply have been shifted into September and October.

The longer the market remains firm, the greater the incentive for mills to accelerate crushing and place more product on the market. If that additional supply meets distributors that are already fully stocked, the correction could be rapid.

The outlook, therefore, is for a firm market in the short term, although the fundamentals point to a possible reversal further ahead.

Over the next 20 to 30 days, the combination of still-low distributor inventories, recovering consumption, lower immediate availability from mills, export commitments and delayed crushing should continue to support hydrous ethanol prices.

However, once inventories have been rebuilt and crushing accelerates, the market will once again turn its attention to supply. If sugarcane volumes effectively become available and mills manage to increase their processing pace, the same force currently supporting prices could turn into selling pressure in the following months.

What Happened to Hydrous Ethanol in July

The historical series for Ribeirão Preto shows that the hydrous ethanol market entered a new phase of deterioration in July 2026, with the price reaching R$2.6778 per liter (approximately US$0.52 per liter), down 4.76% from June and 15.79% compared with July 2025.

More significant than the monthly decline, however, is the fact that hydrous ethanol traded almost 20% below the five-year average for July. The historical July average stands at R$3.3339 per liter (approximately US$0.64 per liter), while the price observed in 2026 was R$2.6778, representing a 19.68% discount.

The series shows that the market entered the second half of the year under strong supply pressure, while demand has yet to demonstrate enough strength to fully absorb the increase in production.

At the same time, the projection of R$2.65 per liter for August (around US$0.51 per liter) suggests a possible slowdown in the downward movement, although there is still insufficient evidence to characterize a structural reversal in the trend.

Pressure intensified in May, when the price reached R$2.81 per liter; it remained virtually unchanged in June at R$2.8118 and fell again in July to R$2.6778. This sequence shows that July did not mark the beginning of weakness in hydrous ethanol, but rather the deepening of a downward trend that developed throughout the second quarter as the advancing harvest increased product availability and demand showed a lower capacity to absorb it.

Higher Ethanol Production Puts Pressure on Prices

The main fundamental behind this behavior is the increase in ethanol availability during the 2026/27 crop season. The advance of sugarcane crushing in the Center-South increased raw material supply and, consequently, ethanol production capacity, precisely during a period in which demand did not grow proportionally.

When supply grows alongside demand, the market can absorb additional volumes without major price changes. However, when production increases faster than consumption, a surplus emerges that must either be stored or sold at lower prices.

This imbalance helps explain the pressure observed during July: not necessarily because of an absence of ethanol demand, but because of the speed at which supply increased relative to the market's capacity to absorb it.

This dynamic becomes even more important when inventory management is taken into account. As long as mills have sufficient physical storage space and financial capacity to hold the product, they can wait for more favorable market conditions.

But when availability increases simultaneously across different production units, tank space acquires greater economic value. Decisions no longer depend solely on expectations for future prices but must also take into account the financial and operational cost of carrying inventory.

In certain situations, the need to convert inventories into cash can encourage more aggressive sales, increase availability in the spot market and create additional downward pressure on prices. In this way, low prices can simultaneously be both a consequence of excess supply and a mechanism for correcting it.

Distributors Maintain a Cautious Strategy

On the demand side, the more cautious behavior of distributors also contributes to keeping the market under pressure. In an environment of ample availability, purchasing closer to actual requirements reduces the risk of carrying high inventories and lowers the urgency to acquire additional volumes.

The ability to postpone purchases increases buyers' bargaining power and limits mills' ability to sustain higher prices.

This becomes even more relevant when it coincides with a period of strong production and seasonally weaker consumption. School holidays tend to limit growth in fuel demand, and in a market already pressured by rising supply, any additional slowdown in consumption contributes to increasing the available surplus.

Despite this scenario, current price levels are beginning to create mechanisms that could limit further declines. The lower the price of hydrous ethanol, the more competitive it tends to become relative to gasoline, increasing the economic incentive for consumption.

The decline recorded in Ribeirão Preto therefore represents a negative factor for mill profitability, but a potentially positive one for demand. The issue lies in the lag between lower prices at the production level and their transmission to the final consumer.

The reduction must move through the different stages of the supply chain before consumers perceive a sufficiently significant change in the price relationship between ethanol and gasoline. For this reason, the upstream market may remain under pressure even as the competitiveness of hydrous ethanol begins to improve.

The 32% Blend Changes the Market Dynamics

Another important factor for the second half of the year is the increase in the anhydrous ethanol blend in gasoline from 30% to 32%. The change creates additional structural demand for anhydrous ethanol and alters the dynamics of the sugar-energy complex.

The impact on hydrous ethanol, however, occurs mainly indirectly through mills' production decisions and the arbitrage between sugar, anhydrous ethanol and hydrous ethanol.

With greater demand for anhydrous ethanol, the relative profitability of ethanol becomes more important in determining the industrial production mix. This could encourage a larger allocation of raw material to biofuel production and, depending on market conditions, reduce the potential availability of sugar.

However, the increase in the blend does not automatically translate into an equivalent reduction in hydrous ethanol supply, since the impact will depend on industrial decisions and relative prices among the different products.

Against this backdrop, the sugar-ethanol production mix is likely to become increasingly important. With hydrous ethanol trading near R$2.68 per liter (approximately US$0.52 per liter), mills compare its returns with the alternative of producing sugar and anhydrous ethanol, whose structural demand increases with the 32% blend.

This arbitrage can act as a corrective mechanism if hydrous ethanol remains excessively undervalued. Relatively more attractive sugar or anhydrous ethanol prices may encourage changes in the production mix and limit marginal hydrous ethanol output, while an improvement in ethanol's relative returns could produce the opposite movement.

Because industrial adjustments do not occur instantaneously, however, there is a lag between changes in relative prices and actual changes in supply.

August Could Mark a Slowdown in Price Declines

The projection of R$2.65 per liter for August (around US$0.51 per liter) is therefore an important data point. Following the decline from R$2.8118 per liter in June to R$2.6778 in July, the August estimate represents an additional decrease of only approximately 1%.

The slowdown is significant because it contrasts with the intensity of the losses recorded since the beginning of the year. The market is not yet projecting a recovery, but the pace of deterioration appears to be slowing.

This could indicate that the market is approaching a stabilization zone, where bearish fundamentals begin to encounter resistance from the effects generated by lower prices themselves, particularly through improved competitiveness, potentially higher consumption and adjustments to the industrial production mix.

Confirmation of this possible stabilization will depend primarily on inventory behavior.

If stored volumes continue to rise even with prices near R$2.65 per liter, it would indicate that demand is still not responding sufficiently and that the surplus remains high. Under this scenario, further price declines could be necessary to stimulate consumption or trigger production adjustments.

Conversely, a slowdown or reduction in inventories would indicate that lower prices are fulfilling their economic function by encouraging consumption and absorbing part of the excess supply.

The Second Half of the Year and the Supply-Demand Balance

The dynamics of the second half of the year are therefore likely to differ from those observed during the first half of the crop season. In August, supply should continue to exert significant pressure, but the expectation of R$2.65 per liter (approximately US$0.51) suggests a possible slowdown in the pace of decline.

At the same time, implementation of the 32% blend begins to have a more effective impact on anhydrous ethanol demand, while lower prices increase the competitiveness of hydrous ethanol.

In September, inventory levels and distributor purchasing behavior will become even more important, particularly in determining whether increased demand will be sufficient to absorb the product accumulated during the months of peak crushing.

In October, a potential seasonal reduction in sugarcane availability could begin to alter the physical balance, although the magnitude of this movement will depend on the pace of crushing and weather conditions.

The historical series highlights the magnitude of the correction experienced throughout 2026. The price fell from R$3.71 per liter in January (approximately US$0.72) to R$2.6778 in July (around US$0.52), accumulating a decline of nearly 28%.

At the same time, July ended 15.79% below the same month a year earlier and 19.68% below the five-year average. These figures demonstrate that a significant portion of the excess supply is already reflected in market prices.

This does not rule out further declines, but it means that additional downward moves would require continued supply growth, further deterioration in demand or a combination of both. The further prices move away from the historical average, the greater the economic incentive for market participants to adjust their behavior.

The key issue, therefore, is no longer solely the scale of production but rather the market's capacity to absorb the surplus.

High production will remain a bearish factor as long as demand does not grow proportionally, but current prices are already beginning to create conditions for a consumption response and supply-side adjustments.

The increased competitiveness of hydrous ethanol, additional demand for anhydrous ethanol generated by the 32% blend and arbitrage between sugar, anhydrous ethanol and hydrous ethanol could gradually help reduce pressure on the market.

In this way, July 2026 consolidates one of the most pressured phases of the recent hydrous ethanol cycle, while also bringing the market closer to a level at which the decline in prices itself begins to generate support mechanisms.

The short-term bias remains bearish given the high availability of product and still-cautious demand, although the projection of R$2.65 per liter (around US$0.51) for August suggests that the adjustment process is slowing.

Confirmation of a change in trend will depend mainly on the evolution of inventories, distributors' response, the competitiveness of hydrous ethanol and the actual effects of the 32% blend on anhydrous ethanol demand and the industrial production mix.

The second half of the year, therefore, is likely to be marked by a transition from a market dominated by supply growth toward a market increasingly focused on demand's capacity to absorb supply and the speed at which surpluses are reduced.

By Mauricio Muruci: Sugar and Ethanol Markets Analyst at SAFRAS & Mercado.

Editor's Note: This article was originally written in Portuguese. The AgroLatam editorial team translated and editorially adapted it into English while preserving the content, data, analysis and meaning of the original text. To facilitate the interpretation and comparison of prices for readers across the region and international markets, approximate conversions from Brazilian reais (R$) into U.S. dollars (US$) have been added. These conversions are provided for reference purposes only and were calculated using the reference exchange rate applicable at the time of editing.