April 25, 2013

Brazilian Government Announces Steps to Aid Ethanol Sector

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

The Brazilian government announced several steps designed to help increase investments in the struggling ethanol sector and to stimulate increased production of the fuel. The steps include: reducing the amount of taxes on the fuel, opening a low-interest line of credit for increased sugarcane planting and ethanol storage, and increasing the amount of ethanol blended into gasoline. All of these measures will take effect on May 1st.

The first and most immediate step is to reduce the amount of taxes levied on ethanol fuel. The tax reduction is equivalent to R$ 0.12 per liter or approximately US$ 0.23 per gallon. According to Brazil Treasure Secretary, Guido Mantega, the tax reduction is designed to increase the margins of ethanol producers hard hit by rising costs and not necessarily to be passed on to consumers in the form of lower prices.

The other measure announced by the Treasure Secretary is the opening of a low-interest line of credit for sugarcane producers. Producers can borrow the money for either the renovation of existing sugarcane fields or the planting of new sugarcane. Four billion reals will be available in 2013 at an interest rate of 5.5% (it used to be 8.5%) with repayment terms of 72 months and a grace period of 18 months for the first payment. An additional R$ 2 line of credit will also be available for the construction of additional ethanol storage units. The interest rate for the storage line of credit has been reduced from 8.7% to 7.7%.

After sugarcane is planted, it is harvested repeatedly for 5-6 years. If the sugarcane is older than six years, it starts to lose about 10% of its productivity for every year it is not replanted. The problem is that during the replanting process, the producer must spend money on planting, fertilizers, and chemicals and there is no income from the field during the first year. Most producers need to borrow money for this process and there had been only limited credit available for production loans.

Additionally, sugarcane production has only been marginally profitable in recent years because sugar/ethanol mills have been hurt by artificially low gasoline prices. Ethanol prices cannot exceed 70% of the price of gasoline or owners of flex-fuel vehicles will choose to purchase gasoline instead of ethanol. The government has kept the gasoline prices depressed as a means to hold down inflationary pressures.

The other action that could help is the ethanol sector is the increase in the amount of ethanol blended into Brazilian gasoline. Starting on May 1st, the blend will go from 20% (E20) to 25% (E25). The blend had been at 25% for many years, but it was lowered several years ago in order to extend limited ethanol supplies. Increasing the amount of ethanol blended into gasoline will help to hold down the cost of gasoline since ethanol is cheaper than gasoline.

All these measures are coinciding with the start of the 2013/14 sugarcane harvest in southern Brazil.