By: James Cordier, OptionSellers.com

The use of ethanol produced from sugarcane is mandated by the Renewable Fuels Standards (RFS). The mandate calls for the use of renewable fuels, but it has additional requirements that specify cleaner sources of advanced biofuels like sugar ethanol.

Brazil is the largest producer of sugar in the world. However, nearly half of their production is converted into sugar ethanol. This booming South American country and the U.S. produce about 90 percent of all the ethanol in the world. This fuel source is currently cheaper and much cleaner burning than U.S. corn ethanol. Imports into the U.S. have soared in the second half of 2012 and that trend is expected to continue in 2013.

For 2012, the RFS required 15.2 billion gallons of biofuels to be used – 3 billion gallons from advanced biofuels (sugar ethanol) and 12.2 billion gallons from corn ethanol. By 2022, the RFS will require the annual use of 36 billion gallons of biofuels – 21 billion gallons from advanced biofuels and 15 billion gallons from corn ethanol. Sugar ethanol is an advanced biofuel, while corn ethanol does not qualify. You can see the large upswing in demand for sugar ethanol going forward.

Ethanol usage could be much greater than expected in 2013. Ethanol is used widely in Brazil. The government dropped their ethanol requirement in gasoline from 25 percent to 20 percent last year. Brazilian officials will raise the requirement back to 25 percent this year, which will be a sizable increase in usage.

The government of the world ‘s fifth largest country has kept the price of gasoline artificially low, in part, to control inflation. This is costing the government billions and the policy may soon change. A Brazilian newspaper reported on January 15 that gasoline prices would be raised 7 percent. The Energy Minister, Edison Lobao, has discussed raising prices but has yet to confirm the exact details as of this writing.

The price of oil and gasoline also play a part in demand for sugar – now and into the future. As gas prices move higher, more demand will filter to ethanol. Oil prices are holding steady above $90 and this is supporting gasoline prices. OPEC is expecting oil prices to remain above $90 for 2013. This should make ethanol more competitive to gasoline and consumption should increase.

Sugar ethanol also competes with corn ethanol, which is produced in the U.S. The production of corn ethanol dropped last year, as corn prices hit record highs near $8.50. The economics don ‘t justify high ethanol production when corn prices are near record highs. The latest USDA crop reports showed a larger drop than expected of corn supplies. Corn supplies remain critically tight and prices have moved back up to $7.50.

About the author:

James Cordier is author of McGraw Hill ‘s The Complete Guide to Option Selling. He is also the founder of Liberty Trading Group/OptionSellers.com, an investment firm specializing in writing commodities options for high net-worth investors. Appearing regularly on CNBC, Bloomberg Television and Fox Business News, James ‘ market comments and research forecasts are published by most major financial publications including The Wall Street Journal, Reuters World News, Forbes, and Barron ‘s. For more information on managed option selling accounts visit www.OptionSellers.com.