April 5, 2012

Brazil Government Promotes Small Start-up Ethanol Producers

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

The Brazilian government is set to launch a new stimulus program aimed at increasing ethanol production from small distilleries. The goal of the program is to increase ethanol production by decentralizing the production and distribution of the fuel. One of the big differences with this program is that these small distilleries will be allowed to sell the fuel directly to the consuming public or to distributors, whichever they prefer. Another built in incentive in this program is that the excise tax on the fuel would be lowered to help stimulate production.

The focus of the program is on small producers of ethanol of up to 25,000 liters per day. The program would allow small farmer cooperatives to produce ethanol and to sell it to their members and the general consuming public, or to distributors if they prefer. The ability to sell ethanol to local consumers is a drastic departure from the current regulations that requires that ethanol be sold through distributors. The distributors of course want to contract the fuel at the lowest price from the largest producers. This requirement that the ethanol be sold through distributors is probably the largest impediment for the entry of small start-up ethanol producers into the market, they just can't compete on price with large producers.

Any new ethanol producer would have to be authorized by the National Petroleum Agency (ANP). The new facilities could be financed by state banks or private banks with a minimum loan period of ten years and three years grace period before the first payment.

The amount of tax savings for these small producers would depend on who is making the ethanol, what type of raw materials are used to make it, and the region of the country where it is produced. The government is attempting to use tax incentives to get more ethanol production in regions of the country where there is generally a deficit of the fuel. By decentralizing the production, transportation costs can be held down making the fuel cheaper for consumers, in addition to helping the rural economy.

The government is also trying to stimulate the production of what is called second generation ethanol or cellulosic ethanol production. This is ethanol produced from grass, wood, crop residue, or any other cellulosic materials. The majority of Brazil's ethanol is produced from sugarcane and the increased production of cellulosic ethanol is a way to circumvent the debate of food vs. fuel when it comes to biofuel production.

This entire project may face an uphill battle because it is counter to the economies of scale. The cost of producing ethanol in these small facilities will be higher than in large sugar/ethanol mills, thus the tax savings will have to be large enough to compensate for the higher cost of production.