BRAZIL TO DOUBLE ETHANOL EXPORTS - MINISTER

My comments on the piece below:

The Brazilian government is struggling to keep up with the surge in international interest in ethanol. Brasilia's efforts have been hampered by an industry that is famously ossified in its ways - many farms and distilleries belong to families that have been in the sugar and ethanol business for several decades, if not centuries.

Many are currently looking to cash in on their positions, putting up their properties for sale to foreigners. But there are very few, if any, brokers specialized in trading farms and ethanol-producing machinery. Farm owners in Brazil want their properties appraised by their potential to generate future cash flows - a figure which can be quite high, if one considers that ethanol, in terms of barrels of equivalent oil, has exactly the same value. And, at this point, they rightly feel that the only way for oil is up, as the 20% climb in prices over the past two weeks has made amusingly clear.

Investors coming from the outside, however, want to buy ethanol properties based on their historical value. They consult with a foreign bank in Sao Paulo or in their country of origin and are told that, if something was worth X just one year ago, it can't possibly be worth 10X today.

Well, yes, it can, because these properties will continue generating cash flows for a very, very long time. Depending on the variety, it takes sugarcane only one to one-and-a-half years to grow (or to "come onstream", to borrow terminology from the oil industry). After that, the same plant can be harvested up to five times, before it must be planted again.

So if farms and ethanol industrial equipment have suddenly taken on new-found popularity and are now in much greater demand, foreign investors must pay based on this new market reality. The supply curve of ethanol farms and distilleries is inelastic, even over a period of several years, while the demand curve has dramatically shifted outward.

So investors must value these properties based not on their historical value, as most urbanite bankers in Sao Paulo would have you believe, but based on farmers' subjective evaluation of what is going on.

It is important to remember that these farmers are people who have barely scraped by over the past centuries, many times looking starvation or bankruptcy in the face. They are accostumed to making decisions and forecasts based on little or no information at all about weather and market conditions.

Add to this that, while many of them have very large ethanol operations, they may not even possess an email address. Then one begins to get an idea of the hurdles facing foreigners looking to do business in Brazil.

In any negotiation, Brazilian farmers can wait. Time is on their side.
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Reuters, 05/02/2007.

Thanks to Ethanol Brasil

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Brazil hopes to double its ethanol exports by 2010 to meet growing demand for the alternative fuel, largely from Japan and Sweden, Finance Minister Guido Mantega was quoted as telling the Times newspaper in an interview.

He also urged Britain to use more ethanol as part of the fight against global warming, according to the British daily.

Brazil aimed to increase its ethanol exports to $1.3 billion in 2010 from $600 million in 2005, largely due to agreements signed with Tokyo and Stockholm, Mantega was quoted as saying in comments published on Monday.

"We would like the majority of countries to adopt these alternative sources of energy and fuel," he told the Times.

"In the UK ... it's possible to give more importance to ethanol. We can develop joint projects in such a way that we can introduce these alternative energy sources into regular consumption here," Mantega said, speaking on a trip to London.

Brazil, the world's biggest ethanol exporter, started to develop ethanol production from sugar cane in the 1970s.

Mantega said he hoped the latest round of world trade talks would help open the U.S. market to Brazil's ethanol.

"Our costs are 50 percent lower and the quality of the energy source is higher than the ethanol made from corn (maize) in America. So we can have more co-operation with America if they open the possibility for more imports from Brazil of ethanol and other agricultural products," Mantega said.

He also touched on the importance of protecting Brazil's Amazon forest, the largest rainforest that has been called the lungs of the world. "If other countries want to keep an atmosphere that has less pollution, these countries should help Brazil with material resources in such a way that we could have much more rigorous surveillance.

As for Brazil's economy, Mantega said the country was set to experience an economic growth rate of between 4.5 percent and 5 percent in the coming years, according to the Times.

Follow what's happening in the Brazilian ethanol market on Ethablog, the only blog in English dedicated to Brazilian ethanol.