April 23, 2013

Brazil's Bioenergy Sector Continues to Struggle Economically

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

Even though sugarcane production in Brazil is expected to increase during the 2013/14 harvest season, the sugar/ethanol sector continues to be in the grip of a financial crisis. During 2012, 41 sugar/ethanol mills in southern Brazil closed down operations due to financial distress and more are expected to close in the coming years unless conditions improve.

Based on a recent report from the Union of Sugarcane Industries (Unica), the director of the Bioenergy Producers Association of Parana (Alcopar), Jose Adrianodo Silva Dias, expects that 60 sugar/ethanol mills in Brazil will close their doors in the coming years if the financial situation does not show significant improvement.

Most industry observers feel the source of the problem has been the subsidies used to keep the price of gasoline artificially low in order to control inflationary pressures. The cost of producing ethanol continues to increase, but ethanol prices cannot exceed 70% the price of gasoline because if it does, owners of flex fuel vehicles will purchase gasoline instead of ethanol (E100). Over half of the cars on the road in Brazil today are flex fuel vehicles and over 90% of all new cars sold in Brazil are flex fuel. Therefore, an ever increasing percentage of the motoring public in Brazil can decide on a daily basis which fuel to put in the vehicle and over the last several years they have been choosing gasoline (E20 or E25) instead of ethanol (E100).

The bioenergy sector is hoping the President Rousseff will follow through on her promise to help the sector. Potential aids would be to lower taxes on ethanol fuel and offer low interest loans for sugar/ethanol mills. In the meantime, 20% of the mills in Brazil have a high debt load and they are attempting to improve revenues by increasing production.

In their first estimate of the 2013/14 harvest season, Conab is expecting the 2013/14 Brazilian sugarcane production to increase 11% to 653 million tons. In southern Brazil, sugarcane production is expected to be 532 million tons. Brazilian sugar production is expected to increase 13.6% to 43.5 million tons compared to the 38.3 million tons produced in 2012/13. As far as ethanol is concerned, Conab is expecting ethanol production to increase 9% to 25.7 billion liters.

The production of sugar helps to stabilize the sector because most of the sugar is exported and the price of sugar is based on the international price. Whereas for the ethanol industry, it is almost entirely based on domestic consumption since 95% of the ethanol is consumed domestically. Brazil has had a policy in place for several decades to give incentives for consumers to purchase ethanol, but since the discovery of huge petroleum reserves of the southeastern coast of Brazil, the government's interest in ethanol productions seems to have waned.