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March 19, 2015

Number of Sugar/ethanol Mills in Brazil Continues to Decline

According to the president of the Sugarcane Growers Federation of Brazil (Feplana), of the 439 sugar/ethanol mills in Brazil, only 343 continue to operate normally (78%). The others are either closed permanently (41), not operating and are in bankruptcy proceedings (33), operating while in bankruptcy (10), and there are an additional 30 mills expected to enter bankruptcy within the next six months.

The total number of sugar/ethanol mills in Brazil have shrink 20% since 2009 when President Rousseff assumed office. Since 2009, the sector has lost 350,000 jobs due to the mill closing and the requirement that hand-cutting of the sugarcane be replaced by mechanical harvesting. The change was mandadet as a way to reduce the air pollution that resulted from the burning of the sugarcane prior to being harvested by hand.

The problems for the sector started with the financial crisis in 2008 and they were compounded by adverse weather and low sugar prices. The Brazilian government made the situation worse by policies instituted since President Rousseff took office. The government reduced the tax on gasoline as a way to control domestic inflation, which in turn lowered the price of ethanol. Ethanol prices are directly linked to the price of gasoline, so any decline in gasoline prices also results in depressed ethanol prices.

Due to a lack of domestic refining capacity in Brazil, Petrobras was forced to import gasoline into Brazil. The gasoline which was imported was then subsequently sold at a price below what Petrobras had paid on the open market. This was done in an attempt to control domestic inflation, but it too forced down the price of ethanol in Brazil.

The Brazilian government recently increased the amount of ethanol blended into gasoline from 25% to 27% and they reduced some of the taxes levied on ethanol. Both of these measure will help the sector, but only marginally.

Producers are also still waiting for disaster payments promised by the government after the worst drought in 50 years severely impacted the 2012/13 sugarcane crop. Legeslation passed in July of 2014 authorized payments of R$ 12.00 per ton of sugarcane, but they have not yet been paid even though the harvest concluded two years ago.