June 20, 2014

Corn-Based Ethanol Way to Increase Corn Usage in Mato Grosso

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

The corn crop in Mato Grosso is almost exclusively grown as a second crop following soybeans and farmers in the state have been so successful in adopting corn into their crop rotations that it is estimated that corn production in the state could hit 35 million tons within ten years.

Producing corn is not the problem, selling the corn at a profit though is a problem. The excess corn production in the state has led to low domestic corn prices and the need to look for increased demand for corn within the state instead of paying high transportation costs to ship the corn out of state to livestock producers in southern Brazil or exporters in southeastern Brazil.

The need to increase the demand for corn was the main topic of discussion at a recent meeting held in Mato Grosso at the start of June. The meeting was sponsored by the Mato Grosso Soybean and Corn Producers Association (Aprosoja-MT) and it highlighted a study conducted by Celeres Consultoria looking at the viability of producing ethanol from corn instead of sugarcane.

Mato Grosso is expected to produce approximately 15.5 million tons of corn in 2013/14 (22.5 million tons were produced in 2012/13), but the domestic consumption of corn in the state is only about 3 million tons. That means there is a tremendous amount of corn that must be transported out of the state and sometimes the transportation costs are higher than the price of the corn itself. Therefore, there is an incentive to utilize more of the corn within the state.

There are two ways to increase corn consumption - increase livestock operations and use the corn to make ethanol. There are already several sugar mills that utilize corn during the 3-4 months when sugarcane is not available, but the amount of corn utilized in this manner is very small. A much greater use of corn would be from corn-based ethanol facilities and in fact, there are now investors contemplating the construction of corn-based ethanol facilities in the state.

The study by Celeres indicated that a corn-based ethanol plant that costs US$ 69 million to build would pay for itself in five and a half years with a return on investment in the range of 10% to 25% depending on corn prices and ethanol prices.

Producing ethanol from corn is certainly possible, but a bigger problem is selling the ethanol at profitable prices. Mato Grosso currently produces about one billion liters of ethanol per year from sugarcane and 60% of the ethanol is sold within the state and 40% is sold primarily in other northern Brazilian states. The current market for ethanol is saturated and the way to increase ethanol consumption is to increase the price differential between ethanol and gasoline. The federal government has been reluctant to increase the price of gasoline out of concern for domestic inflation. If gasoline prices would increase, that would increase the ethanol prices as well.

Currently, the Brazilian government only has an incentive program in place to stimulate the production of sugarcane, but even with that program, the sugar sector has struggled in recent years due to adverse weather in the sugarcane fields and a lack of margins for ethanol producers.