President George W. Bush with a race car that is fueled by ethanol, during his tour of the Novozymes, a biotechnology facility in Franklinton, N.C, in February.  (Photo: Paul Morse/The White House)        Font Size ..... Small Normal Big Very Big

BY THOMAS RIDEG
AND MICHAEL SMITH
InfoAmericas

High energy prices and environmental concerns will benefit the bio-fuel industry in Brazil for many years to come. Billions of dollars have been invested in research and development for bio-fuels, and none have received as much attention as ethanol.  This fuel, derived from crops that have been grown for millennia, seems like an ideal alternative energy, but it can be controversial as it raises skepticism about planting for energy as opposed to planting for food. Some also consider the ethanol-producing process inefficient, especially when using corn as feedstock.

The two main global producers of ethanol are the U.S. and Brazil.  The U.S.’s main source of ethanol is corn, while Brazil’s main source is sugarcane.  As a result, Brazil has a large advantage over the U.S. in ethanol production: sugarcane is much more efficient than corn economically, energetically and environmentally for producing ethanol.  One liter of ethanol costs $0.28 to produce from sugarcane as opposed to $0.45 from corn, and one hectare of sugarcane produces 7,080 liters of ethanol compared to 3,750 liters from one hectare of corn.

ETHANOL BOOM

Brazil’s favorable climate, topography and soil availability are also important advantages.  The country currently produces 17 billion liters of ethanol, but is making plans to increase production to 40 billion liters over the next five years without affecting the environment or the existing food supply. In 2006, Brazil harvested 6.2 million hectares of sugarcane, yielding 74.05 tons per hectare for a total of 457 million tons.  Approximately half of this production was destined to ethanol and other half went to sugar.

Of Brazil’s 851 million hectares of land, 405 million hectares (48 percent) correspond to the Amazon forest or legal natural forest reserves. Of the remaining area, 220 million hectares is pasture land (for cattle), 42 million hectares produce annual crops (soybeans, corn), 15 million hectares grow permanent crops such as oranges, coffee and sugarcane, 20 million hectares are covered by urban centers, five million hectares are being reforested (pine and eucalyptus) and 54 million hectares are used in various other ways, such as lakes, rivers, dams, etc. The remaining 90 million hectares are cerrado (savannah), which is available to increase sugarcane planting. Furthermore, about 100 million hectares of current pasture areas are degraded and can be transferred to other plantations, which means that a total of 190 million hectares can be incorporated into ethanol production over the next few years.

In addition to the availability of land, sugarcane has a major advantage over corn in its production process, which is comparable to that of eucalyptus over pine in reforesting.  Once sugarcane is planted, it takes 18 months to receive a first cut.  For the next four years the same plant will sprout to give a second, third, fourth and fifth cut. It is only on the sixth year that sugarcane should be replanted. Corn must be planted annually.

TO JAPAN AND INDIA

Brazilian sugarcane producers are living a period of euphoria. Over the next six years, one sugar-ethanol plant is planned to be built every month. Today, Brazil has 335 plants already producing and this total should jump to 409, with investments of $14.6 billion dollars planned. A further 189 plants are under study. Of the 17 billion liters produced today, 3.5 billion liters (20 percent) is exported. Only one-third of exports go to the U.S., due to the very high tariff on imported ethanol. The rest goes mainly to Japan and India.

The importance of ethanol as a renewable source of energy is such that in March this year, President Bush visited Brazil exclusively to discuss ethanol. President Bush chose not to visit the political capital, Brasília, and instead visited São Paulo state, where 60 percent of Brazil’s ethanol is produced. Brazilian producers were hoping that this visit would bring tariffs down to facilitate exports.  Producers believed that the U.S. could allow imports of ethanol in quotas that would be pegged to the U.S. consumption, ensuring that there would not be a flooding of Brazilian ethanol on the U.S. market. 

Although no policy changes were announced, the Bush visit did have indirect results. Brazil has land, climate and labor, but lacks financing.  Bush’s visit encouraged U.S., European and Japanese investors to plan on making more financing available to plant sugarcane, build mills and help resolve chronic logistics problems related to roads, railways and port infrastructure.  Brazil does not currently have the capacity to substantially increase exports, and further investment will be critical to address logistic bottlenecks. 

The corn needed to produce ethanol for the U.S. will require shifting agricultural area now planted for food to be planted for fuel. As the U.S. agricultural area is almost fully planted, this means that an increase in corn plantation results in a decrease in soybean area. A large amount of U.S. corn is exported, so part of that corn can go to fuel. This means that a triple window opens up for Brazil: the ethanol market itself, the corn market with increasing exports to fill the gap left by the U.S., and the soybean market also left by the U.S. with less acreage planted.

ETHANOL IN THE BRAZILIAN AUTO INDUSTRY

Brazil has been ahead of the bio-fuel game since the early 1970’s with its ethanol-powered vehicles.  Following the oil crisis, Brazil’s military government launched a program to subsidize mills to convert sugarcane into ethanol.   In the mid 1980s, most of Brazil’s cars were fueled with ethanol.  In the late 1980s and early 1990s, when oil prices were low, the government stopped subsidizing mills, who in turn swapped production from ethanol to sugar.  In 2003 the first “flex” technology car models were introduced into the Brazilian market and in 2006, flex-powered vehicles accounted for 78 percent of sales nationwide.  Consumers have the option to fill their tanks with the cheapest fuel, depending on current prices.  They must take into account that although ethanol is less expensive by volume, it also has higher consumption of fuel per distance covered.

Thomas Rideg is director of marketing and sales at InfoAmericas. Michael Smith is InfoAmericas' agribusiness consultant.

COMPARISON OF BRAZILIAN AND US ETHANOL INDUSTRIES

 Source: InfoAmericas.