March 7, 2012

Gov. Releases Details of Strategic Plan for Sugar/Ethanol Sector

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

The Brazilian government recently released more details of their Strategic Plan for the Sugar/Ethanol Sector. The goal of the plan is to increase the amount of sugarcane used to produce ethanol over the next four years and to reestablish a pattern of growth in the sector. Within the next four years, the government wants ethanol to become the principal fuel used in the majority of light vehicles traveling Brazilian highways.

In order to achieve that goal, the amount of ethanol produced in Brazil must be ample enough to sustain a 25% mixture of ethanol in gasoline (E25) and to power 50% to 55% of the light vehicles in Brazil with pure ethanol (E100). The source of funds used to finance this enormous plan will be from the National Development Bank (BNDES) and the funds will be dispersed in the form of low interest loans.

The strategic plan has three principal parts -E renovate existing sugarcane fields, increase the overall acreage of sugarcane, and greatly expand the stockpiling of ethanol in order to avoid price surges during the inter-harvest periods.

The first part of the plan is the easiest to accomplish. The goal is to renovate 6.4 million hectares of ageing sugarcane by the year 2015 at a cost of approximately R$ 29 billion. Sugarcane is grown for a number of years before the crop is replanted, but once the sugarcane has been cut six times, the productivity of the sugarcane begins to decline by approximately 10% per year.

Today, the average age of the sugarcane in Brazil is over six cuttings which is probable a principal reason why sugarcane production has stagnated in recent years. Since the worldwide economic meltdown of the last few years, sugarcane producers in Brazil have not had the necessary credit to renovate their fields. This plan aims to correct that problem by quickly injecting money into the system for sugarcane renovation.

The second part of the plan is to increase the overall sugarcane acreage in Brazil by 1.4 million hectares over the next four years at a cost of R$ 8.5 billion. The Brazilian sugarcane processing industry is currently 16% underutilized an in order to bring the industry to full capacity the total sugarcane would need to be increased by 355,000 hectares per year for the next four years.

The third part of the plan is to increase the stockpiling of ethanol during the inter-harvest period (December to March) thus avoiding the annual spikes in ethanol prices during this period. In order to do that, the storage capacity must be greatly expanded and some of the ethanol produced during the harvest period needs to be set aside for the inter-harvest period. Domestic consumption is estimated at 1.9 billion liters per month and if 70% of that is financed, the cost would run approximately R$ 4.5 billion per year. A program similar to this has been tried before with limited success.

The strategic plan would be complimented by increased resources for research and development of new sugarcane technologies. The research budget of Embrapa would be increased by R$ 40 million over the next four years to develop new sugarcane varieties that are more tolerant of dry weather and well adapted to the conditions of south-central Brazil. Embrapa is also working on cellulosic ethanol production (second generation ethanol) made form sugarcane residue left over from processing as well as from sugarcane residue in the field. Estimates are than Brazil could increase its ethanol production by 40% by developing successful cellulosic ethanol production practices.

Embrapa is also ramping up its efforts to bring these new technologies to the field by developing mini courses for producers, and conducting field days, and seminars promoting the new technologies.

In total, this is a very ambitious plan, but many in the industry feel it is what is needed to jump start the industry back to sustainable growth.