BRAZIL ETHANOL ROUNDUP MARCH 30 2007

On March 30^th, “The Washington Post” published an editorial by President Lula. The theme, as could be expected, was Brazilian ethanol. Lula tried to assuage fears regarding the expansion of sugarcane monoculture into the Amazon forest and other sensitive ecosystems, such as the Pantanal, the most extensive wetlands in the world, located deep in the interior of Brazil, in the states of Mato Grosso and Mato Grosso do Sul; and the Atlantic Rain Forest, where most of the Brazilian population has settled since the 1500’s and which has now been reduced to less than 7% of its original area.

In the Washington Post editorial, however, Lula guaranteed that, “Ethanol is not a direct menace to tropical rain forests, as Amazonian soil is highly unsuitable for growing sugar cane. Moreover, under Brazil's unwavering commitment to environmental protection, deforestation has fallen by 52 percent over the past few years.”

As I have pointed out in previous posts, the Brazilian government has much to gain by remaining seriously committed to sustainable development efforts in Brazil. While the world’s consumers might be increasingly energy-hungry, the global climate crisis is making the advantages of serious conservation painfully evident, and it is not clear whether educated consumers would be willing to exchange the integrity of what is left of the world’s tropical rain forests for biofuels. In any event, as demonstrated by Greenpeace’s successful attempt last March 21^st to shut down a Cargill terminal on the banks of the Amazon River, sound environmental practices are increasingly synonymous with good business.

A good, hard look at the relevant numbers, however, will contribute to a more enlightened discussion of the issue. On March 20^th, former Minister of Agriculture Roberto Rodrigues, currently serving as a director of the Interamerican Ethanol Commission, along with Jeb Bush, former governor of Florida, and Luis Alberto Moreno, president of the Interamerican Development Bank (IADB), laid down the figures:

“Brazilian agriculture currently occupies 62 million hectares, 6 million of which are used for growing sugarcane, the main feedstock used in ethanol production in Brazil. There are an additional 200 million hectares covered by pastures. Of this amount, about 90 million are suitable for agriculture, without the need to enter other ecosystems, such as the Amazon forest. Moreover,” points out Mr. Rodrigues, “over the past fifteen years, the area used for grain production grew only 23%, while output rose more than 110%.”

Referring to concerns that land-price competition from soy and sugarcane can push cattle ranchers into the Amazon (previous post), Mr. Rodrigues noted that modern cattle production processes demand confining or semi-confining – not the traditional free-roaming cattle-raising methods that are decreasing in frequency, though still common, in Brazil (incidentally, the Brazilian media credited these methods, which produced what they dubbed “green cattle”, with having spared Brazilian livestock from the Mad Cow Disease scare of a few years back).

In his Washington Post editorial, President Lula uses similar numbers: “(…) sugar cane (does not) threaten food production. Less than a fifth of the 340 million hectares of arable land in Brazil is used for crops. Only 1 percent, or 3 million hectares, is used to harvest cane for ethanol. By contrast, 200 million hectares are pasture, where the production of cane is beginning to expand.”

President Lula also acknowledged the presence of the elephant of slavery and servitude in the room by acknowledging that, “(…) working conditions for sugarcane harvesters must be improved, and we are fully engaged in doing that.”

Lula took the opportunity to take a gentle stab at the tariffs adopted in rich countries on ethanol from developing nations, by stating that, “A significant increase in the value of agricultural produce and in trade income could easily be achieved if developing countries that might cultivate these biomass crops did not face unfair competition from farmers who benefit from vast subsidies in rich countries.”

However, while the American government adopts a much more aggressive policy of protecting its ethanol industry (which cannot, by any stretch of the imagination, be termed “an infant industry”) than does Brazil, the latter still indirectly subsidizes its own ethanol industry in myriad ways – for instance, by offering subsidized insurance coverage to farmers through “federal subventions”. According to Brazil’s DCI (“Diario do Comercio, Industria e Servicos” – “Commerce, Industry, and Services Daily”), the amount of equity insured, at least in part, by the federal government “totals R$ 2.9 billion (~US$1.4 billion). Some crops, such as beans, wheat, and the second corn harvest receive federal subventions of up to 60%.” At the state level, government money also makes its way into individual farmers’ pockets through similar mechanisms.

Other indirect subsidies involve the vast research network established by the Brazilian government over the past decades. Ridesa (Rede Interuniversitaria para o Desenvolvimento do Setor Sucroalcooleiro – Interuniversity Network for the Development of the Sugar and Ethanol Sector), for instance, is a sugar and ethanol R&D group that comprises seven federally-funded universities: the Federal University of Pernambuco, the Federal University of Alagoas, the Rural University of the State of Rio de Janeiro, the Federal University of Sao Carlos, in the interior of Sao Paulo state, the Federal University of Goias, the Federal University of Parana, and the Federal University of Vicosa, in Minas Gerais state. They all study genetic enhancement techniques for sugarcane.

Ridesa was established in the 1970’s, after the demise of Planalsucar (“Programa Nacional de Melhoramento da Cana-de-Acucar” – National Program for Sugarcane Enhancement). For decades, Planalsucar had been the program that structured, coordinated, and funded Brazilian research efforts to develop improved, diversified strains of sugarcane. Its inception coincided, roughly, with the beginning of the better-known Pro-Alcool program, under which Brazil began its transition in earnest toward ethanol-based automotive fuel circa 1975.

Planalsucar originally operated inside the IAA (“Instituto do Acucar e do Alcool” – Alcohol and Sugar Institute), dissolved by President Fernando Collor’s administration (1990-92), soon after the 1989 ethanol shortage fiasco, when high sugar prices in the international markets made the commodity more attractive for Brazilian producers to sell than did ethanol. After the IAA’s dissolution, Planalsucar’s research stations were integrated into the Brazilian federal university system, the backbone of Brazilian academia. This move, in turn, led to the creation of Ridesa, which today is an important driving factor in the genetic enhancement of Brazilian sugarcane.

Currently, it takes Ridesa 12 to 15 years to get to a new strain. In 2006, Ridesa introduced four new varieties, which were first experimented with in 1992 and 1993. Using classical enhancement techniques, however, Ridesa has been able to produce new strains in six to seven years.

On the Discussion Forum on Brazilian Biofuels, poster Jose Roberto de Oliveira talks about other innovations in sugar technology, this time hailing from the Centro Tecnologico da Copersucar (Copersucar Technological Center – note: Copersucar is one of the largest sugar and alcohol producers in the world):

“Through my own personal experience in the sugar and ethanol industry, in the past, when not a single company had heard of an IPO, because companies in the sector are traditionally family-run businesses, I remember the large number of technological developments, influenced particularly by the Centro Tecnologico da Copersucar, that allowed Brazil to reach its present position”.

Mr. De Oliveira also talks about the misuse of public funds, channeled by the Brazilian National Development Bank (BNDES) through FINAME, defined by the Bank as “financing, without limit in value, for single acquisition of new domestically-manufactured machinery and equipment accredited with BNDES, and associated working capital for micro, small and medium enterprises, through accredited financial institutions”.

Mr. De Oliveira remembers “the shameful ways whereby large portions of FINAME funds were used, during the Pro-Alcool years, to purchase goods unrelated to those that were supposed to increase industrial efficiency. To ignore that this diversion took place is to close our eyes and blindly believe in an all-encompassing responsibility of the soul”.

Brazilians have been accused of many things – “all-encompassing responsibility of the soul” is not one of them. That said, there is a serious effort underway to restructure the industry in Brazil, which foreigners are finding are not as simple as they had supposed.

The U.S., in particular, is belatedly realizing that it has, for too long, neglected its “backyard”, abandoning a policy set forth two centuries ago in the Monroe Doctrine, which, in a (Brazil) nut shell, expressed the American view that Europe ought not to intervene and meddle in the Western Hemisphere’s matters – a right that President James Monroe (1818-25) reserved for the U.S.

Now the U.S. is scrambling to fend off Asian, especially Chinese, advances towards Brazil. China’s Kuok, for instance, already owns 4.1% of COSAN, Brazil’s largest ethanol producer (previous post), and Chinese businessmen and government representatives have been busy visiting the country and visiting plantations and refineries, engaging in a mode of tourism described in Brazil as “turismo sucroalcooleiro” (sugar and ethanol tourism).

With looming oil shortages making their way into official U.S. government policy, expect to see more aggressive wooing by Washington in the coming months. President Bush’s visit to Brazil just this month might be one of the first demonstrations of this new policy.

An interesting American farmers’ view of what is happening in Brazilian agriculture is provided by a group of U.S. expats operating in Brazil. Kory Melby, “a Minnesota farmer who has been in Brazil for four years, (conducts) numerous tours to Mato Grosso state and (o)ffers consulting services to international investors”.

Mr. Melby offers his view on the current conditions out in the field in this blog entry, dated March 23^rd, 2007:

“Brazil soybean harvest is 60% complete. I have heard of some great yields and some so-so yields. I know of some soybeans that yielded 65 bushel per acre in Mato Grosso state in areas that were expected to yield 40 bushel. I know fields in Parana (state) that were supposed to yield 50 bushels and they came in at 40.

“Areas to the east and Northeast of Brazil that usually suffer from drought are having a good year. The rains came.

“However, one must look at the production data by state and then one realizes that if some states only produce 1 or 2 mmt, a 10% bump in yield does not affect the national total. Mato Grosso state lost some production due to spoiled seeds and too much rain. Sugar cane ate up some old soybean acres. Fertilizer was short in some locales and beans were very short in some areas. Asian rust was a problem in some areas at the end of the growing season. Cotton acres also increased this past year. When we add up all the above factors, it is hard to believe the soy crop is still getting bigger as the media indicates. I think as time goes on we will hear of adjustments downward, the crop was not quite as big as expected. I do believe that soy can have a great year in 2008. Expanded area and adequate supplies of fertilizer will guarantee a large crop - 60 mmt in 2008 should be expected.”

Mr. Melby goes on to offer descriptions of his past experiences, including visits to Argentina, where George Soros is also invested (previous post), with American businessmen. Mr. Melby’s blog is placed inside “Agriculture in Brazil”, which gathers and narrates the business ventures of a group of three Americans and one Brazilian partner working in the Brazilian hinterlands.

A final note: Biofuels Markets Americas, one of the world’s leading events in the sector, will take place from April 2^nd to April 4^th, 2007, in Rio de Janeiro. It is “the ‘must attend’ event in the Latin American biofuels calendar. This year’s conference will build on the success of the 2006 conference and focus on the challenges and opportunities for the biofuels industry throughout the region. Last year’s event brought together over 120 experts from 17 countries and this year we anticipate even more.

“Biofuels Markets Americas is part of the Biofuels Markets Global Series of events which attracted over 1000 industry executives from 64 countries in 2006.”

The European version of the event took place in early March in Brussels, Belgium. Former U.S. Vice-President Al Gore was one of the featured speakers.

The Brazilian edition includes a series of speakers who will debate topics such as “Brazil as a Market Leader”, “A Lesson in Success: the Petrobras Story”, and “Brazilian Biofuels Regulatory Trends”.

The event will be chaired by Marcelo Acuna Coelho, an associate editor at Ethablog and author of Ethanol Brasil. Mr. Coelho can be reached by clicking here.

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