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December 19, 2011

Brazil Needs 120 New Mills in 8 Years to Meet Ethanol Demand

As the 2011/12 Brazilian sugarcane harvest ends, by all accounts, the productivity of this year's crop has been a complete disaster. According to the Product Manager of the Center for Sugarcane Technology (CTC), Luiz Antonio Dias Paes, the sugarcane yields in 2011/12 were the1it lowest in 24 years. The poor results are being blamed on cold temperatures, prolonged droughts, and a lack of investments in renovating the ageing sugarcane fields of southern Brazil.

The director of Unica (the Union of Sugarcane Industries) estimates that their members will process 490 million tons of sugarcane, which is down approximately 10% from initial estimates when the harvest began in March of 2011.

For the total harvest season through the end of November, 20.38 billion liters of ethanol and 31 million tons of sugar were produced in southern Brazil. During the second half of November, 44.6% of the sugarcane was processed into sugar and 55.4% was used for the production of ethanol.

While at the same time that sugarcane production has been falling, the demand for ethanol in the domestic market continues to rise. Over 90% of all the new cars being sold in Brazil are flex-fuel vehicles that can use either pure ethanol (E100) or gasoline blended with ethanol (E25). Motorist in Brazil decide which fuel to utilize based on the price ratio between the two fuels. Currently, domestic ethanol prices are very high and as a result, Brazilian motorists have been increasing their purchases of gasoline.

The director of Unica, Antonio de Padua, feels that by the year 2020, their members need to process 1.2 billion tons of sugarcane, or double the present amount, just to service the markets they already have both domestic and international. To achieve that goal, he feels that 120 new sugar/ethanol mills would need to be constructed in Brazil over the next eight years, or 15 per year. This goal seems totally unrealistic considering that only two new mills started operations in 2011.

Building a sugar/ethanol mill from scratch is a tremendous financial commitment. In addition to constructing the actual mill itself, tens of thousands of hectares of sugarcane needs to be planted in close proximity to the mill in order to provide the raw material needed for processing. Those sort of financial commitments have been few and far between since the start of the financial crisis in 2008 and it is doubtful if they will materialize in time to meet the goal of 120 new sugar/ethanol mills in just eight years.