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.

BRAZIL ETHANOL ROUNDUP MARCH 25 2007

On March 20th, while addressing a gathering of ethanol barons in Goias state, in the interior of Brazil, President Lula called them, “national and global heroes, because the whole world is (now) paying attention to ethanol”.

This simple remark became the subject of much controversy in the following days, as representatives from socially-active organizations reminded the Brazilian president that ethanol production in Brazil comes at a steep cost to the hundreds of thousands of workers who toil away in the industry, often laboring under conditions that resemble servitude.

The Catholic Church's Land Pastoral, a division of the Church that aids Brazil’s impoverished farm workers, remarked that, “Ethanol is competitive today only because of the meager pay given to workers.”

The Pastoral’s position has special significance because of its longstanding ties with the ruling Workers’ Party (Partido dos Trabalhadores – PT), which controls the Brazilian federal government. Many of the Pastoral’s members also belong to or sympathize with the Party, which remains largely a unified organism, in spite of occasional offshoots that seek to reclaim the PT’s Marxist and socialist origins.

Since the PT was founded in the industrial outskirts of Sao Paulo in the late 1970s, ideological and power struggles among factions have been intense. For many years, Lula has been the dominant voice in the more moderate of the factions, called the “Articulacao” (“Articulation”). He and his political associates have generally managed to keep the more radical, vociferous wings of the Party under control.

In 2005, Lula found himself embroiled in a protracted political bribery scandal that nearly led to his fall and put a serious dent in his credibility as a bona fide representative of the working classes. The scandal also led to the resignation of key figures who had been Lula’s allies since his days as a union leader, including Jose Dirceu, Antonio Palloci, and Jose Genoino.

So, when Lula promotes Brazilian ethanol, he has to walk a fine line, one that separates pleasing the ruling elites that control the sugar and ethanol industry in Brazil and appeasing the more radical factions that seek cover in the Workers’ Party, nominally subordinated to Lula’s executive power (a power reaffirmed by his reelection in November 2006).

Several of these factions have ties to the MST (“Movimento dos Sem Terra” – “Landless Peasants’ Movement”), which organizes farmland invasions around the country, usually wielding little more than machetes and scythes – a far cry from Colombia’s heavily-armed FARC, for example.

Speaking to the tensions that have long marked capital-labor relations in Brazil’s vast hinterland, my friends at BioPact report that, “the left-leaning Brazilian government is now trying to create a rupture in this complex situation by implementing unique legislation that offers the opportunity to make biofuels the motor of a process in which the redistribution of wealth and the fight against rural poverty are key, and which provides secure livelihoods to poor farmers. The goal is to create a win-win synergy between industrial biofuel producers' needs to be competitive and small family-run farms whose livelihoods are otherwise threatened.”

To this end, BioPact reports, the Brazilian government has created a “Social Fuel Seal”, to be conferred upon producers of biofuels that meet certain sustainability criteria. The Seal thus provides “an instrument that gives biodiesel producers incentives to source their raw materials from smallholders and family farmers. The farmers in turn receive technical assistance and agricultural training, organized by an extension service financed by the biofuel producer that goes beyond mere feedstock production and that enhances food production and security.

Under the Social Fuel Seal both biodiesel producers and family farmers can tap into special credit lines, whereas small farmers enjoy a strong body of social rights that empower them during contract and price negotiations. They are assisted and stimulated to create 'Family Farmer Cooperatives' that act as the intermediary between the smallholders and the biodiesel producers. In fact, the system itself contains a mechanism that makes biodiesel producers prefer to work with such cooperatives.”

Several articles in the international media, such as this one from Brazzil Magazine, have turned their scrutiny to working and environmental conditions in Brazil’s sugar and ethanol industry. It has long been known that rural workers in Brazil are poorly paid and overly exploited – the very definition of labor at the bottom rungs of the economies in developing nations. At the same time, it has been argued that increased mechanization in the industry (for instance, with the deployment of a growing number of harvesters) will make the arcane conditions that still characterize the sector a thing of the past. It has also been noted that such a movement, while allowing for greater productivity, will deprive millions of poor Brazilians from their low-wage seasonal jobs, pushing them toward already-overcrowded metropolitan centers such as Sao Paulo and Rio. With populations of, respectively, 20 million and 12 million, these cities are famous for their favelas (shanty towns) and high crime levels. Tension between the haves and have-nots, in fact, have reached such levels that organized crime, controlled by cell phone from inside the overcrowded, brutal penitentiaries where some drug lords are held, brought Sao Paulo to a grinding halt in May 2006; and did the same to Rio later that year in December.

However, I have to point out that certain cities, such as Ribeirao Preto, Uberaba, Uberlandia, Anapolis, and many other metropolitan centers have the capacity to absorb the bulk of the migration that will result from increased mechanization in the fields. Whether we will see a surge in the number of favelas in these cities as well is a matter of what dynamics will develop once the sugar and ethanol industry starts to receive capital infusions, and whether these infusions will make their way to the lower layers of the population.

The city of Ribeirao Preto, for instance, in the interior of Sao Paulo state, is right now witnessing a boom in its luxury goods sector, with BMW and Mercedes dealers backlogged for several months. Ethanol Brasil carried a story from Valor Economico, the Brazilian equivalent of the Wall Street Journal, reporting that “the sale of 50.02% of stock in the Vale do Rosario Refinery (“Usina Vale do Rosario”) brought even more fortunes to the city of Ribeirao Preto, in the interior of Sao Paulo state, which was already in the middle of the euphoria made possible by the sudden expansion in the industry. In the end of February, 72 people pocketed US$ 404 million with the sale of their stock – and about 70% of them lived in Ribeirao Preto. By the end of this month, other stockholders may also sell their shares, raising the operation to approximately US$ 642 million – twice the city government’s budget.

The deal has heated up the local economy, with increased lines at the dealerships specializing in luxury import cars

The Vale do Rosario operation, which made millionaires out of several people who, just a short while ago, led normal lives, should be used by Bradesco (Banco Brasileiro de Descontos – the largest Brazilian commercial bank) as an example of how they want the bank to operate. The bank financed the US$ 642 million used in the deal in two days, tied together operations in the money markets to allow for the payment of the loan and convinced a part of the shareholders to invest their newly-found wealth with the bank’s high-net-worth-individuals division. Vale do Rosario hopes to see its merger with Usina Santa Elisa, another large refinery, completed in sixty days, thereby creating the second-largest sugar and ethanol company in Brazil."

This situation, evidently, flies in the face of the living and working conditions under which a substantial number of Brazilians toil in the very sugarcane plantations that produce the feedstock processed by the large refineries. Finding redistribution mechanisms capable of alleviating the problem is more than a moral imperative in this case: it is a prerequisite for the international expansion of the Brazilian biofuels industry. For an idea of what might ensue if consumers in the U.S. and Europe begin to equate Brazilian ethanol with sub-standard working conditions and environmental degradation, look no further than the many social and environmental problems that haunt large corporations many years after the fact (Nike’s sourcing from sweatshops, the Exxon Valdez spill, and Union Carbide’s Bhopal incident all come to mind).

A similar occurrence just this week brought to a halt operations at a grain terminal located by the Amazon River in Brazil’s North. The terminal belongs to Cargill, the largest individually-owned corporation in the U.S. and one of the biggest agribusiness corporations in the world.

Reuters reports that Brazilian courts have ordered that Cargill close its grain terminal in the northern state of Para. Brazilian authorities were dispatched to the site on Saturday, March 24^th, 2007, to close down the unit, because of alleged environmental non-conformities. The Federal Attorney in Para (Procuradoria da Republica no Para) confirmed the operation.

The port, controlled by Cargill’s local subsidiary ‘Cargill do Brasil S.A.’, will remain closed until an environmental impact survey, which allegedly should have been carried out when the site was erected, can be concluded, said the Federal Attorney’s office.

In a communiqué released to the press, Cargill said that it is assessing the decision and will appeal, “because, in principle, the reasons put forth by the Judge go beyond (a lower court’s) decision, unduly broadening the scope.” The company also says that the port terminal has the necessary operating licenses from the federal, state, and city governments.

Since 2000, Cargill has struggled against environmental groups such as Greenpeace (which gives the incident ample coverage on its web site), and against the Brazilian Public Attorney’s office, arguing for the legality of its terminal, located on the banks of the Amazon.

The terminal was built there because the location is closer to the Brazilian “soy belt” and to foreign markets than the ports in the Brazilian south.

The incident described above is a not-so-subtle reminder of how advocacy groups can and frequently do interfere with even a large corporation’s affairs. The incident above came on the heels of an invasion of Cevasa, an ethanol refinery acquired by Cargill in 2006 from the Biagi family in Ribeirao Preto, in the state of Sao Paulo.

Blogger “Cargill Profile” says that, “Via Campesina activists invaded the Cevasa ethanol mill owned in part by Cargill on March 7, 2007. The Cevasa property is located in Patrocinio Paulista, roughly 300 kilometers north of Sao Paulo city. Cevasa is a joint venture with Cargill and other local partners. The invasion occurred on the day that U.S. President George W. Bush was scheduled to arrive in Brazil to discuss ethanol with Brazilian president Luiz Inacio Lula da Silva.

Cargill purchased 63% of Central Energetica Vale do Supucai Ltda, or Cevasa, last year. The mill, one of Brazil's largest, produces 1.4 million metric tons of sugar and 125 million liters of ethanol each year, according to Cargill.

Via Campesina (“Peasants’ Way”) is aligned with the larger MST (“Movimento dos Sem Terra”), mentioned at the beginning of this article.

On another note, Bunge, quoting the Agencia Estado news agency, says that “former Japanese Prime Minister Junichiro Koizumi has accepted an invititation to be part of the Interamerican Commission on Ethanol”, whose Board of Directors already includes Jeb Bush, former governor of the state of Florida; Luiz Moreno, president of the Inter-American Development Bank; and former Brazilian Minister of Agriculture Roberto Rodrigues.

Mr. Koizumi will presumably provide the necessary link to Asia, where many countries have expressed growing interest in ethanol. For instance, Japanese trading company Mitsui & Co. is conducting a feasibility study to jointly produce ethanol in Brazil with state-owned oil company Petroleo Brasileiro SA (Petrobras), according to this report from the Boston Globe.

India is also aggressively pursuing alternative energy solutions involving the West. According to BioPact, “in a bid to arm-twist local suppliers of ethanol, India's petroleum ministry is pushing for allowing imports of ethanol, reversing the earlier policy of relying on local production. It is also in favour of allowing imports of biodiesel.

The announcement comes at a time when both the Indian Oil Corporation (IOC) - the largest marketer of petroleum products in the country - and government-owned refiner and marketer Bharat Petroleum Corporation Ltd showed interest to tie up with Brazilian oil major Petrobras to collaborate on ethanol projects, including ethanol imports. Both companies have been asked to explore opportunities in Brazil for the creation of distilleries.

Last year, at the IBSA Summit, Brazil and India signed a biofuel pact allowing the Asian country to invest in its Latin American partner (earlier post). Part of the pact was a bilateral agreement about land sales and leases, which offers Indian producers very favorable conditions for the establishment of energy plantations in Brazil (earlier post)."

The U.S. has also been busy strengthening ties with Brazil. After President Bush’s visit earlier this month, Nicholas Burns, the U.S. State Department’s Under Secretary for Political Affairs, is scheduled to arrive in Brazil later this week, where he will discuss biofuels with Celso Amorim, Brazil’s Chancellor. It would be reasonable to suppose that he would want to continue to widen what some see as a growing rift between Lula and Hugo Chavez.

As Josias de Souza, a reporter with Folha de Sao Paulo, Brazil’s largest daily newspaper, points out on his blog, Helio Costa, Brazilian Minister of Communications, rebutted the Venezuelan ambassador to Brazil, who had criticized him for calling Mr. Chavez’s Thursday night television address to the Venezuelan people "hillarious". Mr. Costa said that, because the program was carried by Brazilian cable and he was the Minister of Communications, he had the authority to give an opinion on the program, which really does reek of a bad talk show from the 1970s (those who so wish may view a Youtube version of it on Mr. de Souza's blog). Mr. Costa went on to tell the Venezuelan ambassador that he was “rude and unfit to be the ambassador to a neighboring, friendly country”.

So far, neither Lula nor Chavez have made any public pronouncements on the verbal skirmish.

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

PANORAMA BRASIL MARCH 18 2007

The ethanol market in Brazil looks extremely bullish for major investors, who have been scrambling to forge alliances and clinch deals, further consolidating the still-pulverized industry. Big names abound and come up repeatedly in many different places.

Brazilian Renewable Energy Company, known as “Brenco”, for instance, is led by former Petrobras chief executive Henri Phillipe Reichstul and has just committed US$200 million to its initial stage.

Mr. Reichstul’s venture partners include James Wolfensohn, former World Bank president; Steve Case, of AOL fame; and Vinod Khosla, Silicon Valley venture capitalist and founder of Sun Microsystems.

Interestingly, American supermarket magnate Ron Burkle, founder of Yucaipa Investments, is also part of the Brazil venture. Mr. Burkle, a longtime Democratic fund-raiser, has been a major contributor to the Republican governor of California, Arnold Schwarzenegger. At the same time, Mr. Burkle is a close friend of former President Bill Clinton, who calls Burkle's Boeing 757 private jet "Ron Air."

It has even been suggested that Tony Blair may take up a seat on the board of one of Burkle's companies when he stands down as Prime Minister of the United Kingdom.

Also in on the Brasil Energy deal is David Zylbersztajn, former general director of Brazil’s ANP (Agencia Nacional do Petroleo – National Petroleum Agency), which, among other things, is charged with supervising Petrobras.

Brenco has divided its venture into “tranches”, presumably to feel the water in a fickle Brazilian and international environment. As things progress, their aim is to reach US$ 2 billion in investments.

In the (now) fast-moving world of biofuels, the lines between the public and private spheres are growing increasingly blurred. Maurilio Biagi Filho, ethanol baron and one of the key figures in the industry, has just denied being invited by President Lula to take over the Ministry for Development, Industry, and Foreign Trade – a key political post in Brasilia, presently occupied by Luiz Fernando Furlan.

In Mr. Biagi’s words, “I have never been invited to take over any ministry. If Lula were to come to me and make an invitation, I wouldn’t reply immediately – I would ask him for some time to think it over. Then I would go and bring the topic up with my wife. And I’m quite sure she would say ‘no’”.

Former Minister of Agriculture Roberto Rodrigues has also been very busy pulling the political levers in Brazil and elsewhere, as a director of the Interamerican Ethanol Commission, whose declared mission is to “(p)romote the usage of ethanol in the gasoline pools of the Western Hemisphere”.

The IEC’s web site goes on to say that “the commission will serve to foster awareness of the benefits of renewable fuels to economies throughout the Americas. The commission will also contribute toward a framework for a rationalized and viable regional marketplace in ethanol, promoting the policy guidance necessary to spur both foreign and domestic investment in environmentally sound renewable fuel production and infrastructure.”

Serving with Mr. Rodrigues on the IEC’s board are Jeb Bush, former governor of the state of Florida; and Luiz Moreno, president of the Inter-American Development Bank.

I urge you to click here to read a full list of participants in the International Ethanol Commission, a list that includes chairpersons and major stakeholders, for a glimpse into the future of the development of biofuels elsewhere in the tropical world.

Mr. Moreno’s Inter-American Development Bank (IADB) is scheduled to meet later this month in Guatemala, a country that, like many others, is waiting in the wings with bated breath to see how the interaction between the two ethanol giants plays out and where exactly it fits in.

Interestingly, Brian Dean, executive director of the Commission, believes that the future will see Brazilian and American expertise coming together. He believes that “there's a lot of cross fertilization that can take place" – an idea that suggests a quid pro quo that would ultimately allow Brazilians to move on from their instinctive reaction against the 54-cent-per-gallon tariff on Brazilian ethanol imported into the U.S. and, instead, focus on more market-friendly economies like Japan, Nigeria, and Venezuela.

Throughout 2007, these three countries will be importing 850 million liters from Brazil, via Petrobras. A test volume of 20 million liters has already been slated to go to Japan, also through Petrobras, a company that is increasingly asserting itself as a force to be reckoned with in the Brazilian ethanol industry.

Putting its money where its mouth is, Petrobras, through Transpetro, its subsidiary in charge of fuel transportation, is preparing to build a pipeline from Senador Canhedo, in the state of Goias, deep in Brazil’s interior, to its refinery in Paulinia, and, from there, to the port of Sao Sebastiao – a dedicated “neat ethanol” pipeline that will run approximately 800 miles and cost around US$ 750 million. Technical details may be found in a rather thorough document by clicking here.

Even with the American tariff in place, Silas Oliva Filho, manager of ethanol and oxygenates at Petrobras, said during a sugar and ethanol conference in Sao Paulo Thursday that the company planned to enter the U.S. ethanol market for the first time in 2007.

Mr. Filho went on to say that “the pipeline is a big risk for the company, because no one knows for sure when the market will come. It could take a few years after construction before we really have the buyers”.

Mr. Filho’s “build and they will come” philosophy holds promise. How to get them to Brazil more quickly is the topic that has Brazilian policymakers and businessmen convening for a growing number of conferences, seminars, and similar events. ConCana (Congresso Internacional de Tecnologia na Cadeia Produtiva da Cana – International Technology Conference in the Sugarcane Production Chain) will take place in the city of Uberaba, in the westernmost portion of the state of Minas Gerais, from March 26th to March 30th, 2007.

This region, known in Brazil as the “Triangulo Mineiro” (“Triangle of Minas”), occupies 93,500 sq. km and is a little larger than Portugal. It is widely seen as a new frontier in the development of the sugarcane market in Brazil.

Traditionally cattle territory, the Triangulo’s flat geography makes for excellent land for sugarcane, as it allows mechanical harvesters to be deployed, thereby raising productivity and eliminating the arcane practices associated with manual labor in sugar fields.

Participants in ConCana include former Minister of Agriculture Roberto Rodrigues; leading agribusiness consultant Plínio Nastari, from Datagro; Manoel Ortolan, from Canaoeste; Vitor Montenegro, from Usina Coruripe; Sílvio Castro, from Canacampo; Silas Oliva Filho, from Petrobras; Wilson Brumer, Secretary for Economic Development of the State of Minas Gerais; Eduardo Carvalho and Antônio Rodrigues, from UNICA, the powerful Sugarcane Growers Association; Jose Matos, from the state of Minas Gerais electric power utility CEMIG; Paulo Kronka, from Usina Coruripe; Marcos Bernardes and Godofredo Vitti, from ESALQ, a leading agricultural research center in the state of Sao Paulo; Jorge Donzelli, Claudimir Penatti e Luis Almeida (CTC – Center for Sugarcane Technology); and João Crisóstomo, from Saccharum Planning and Consulting.

The picture below shows the sponsors behind the event.

One of the topics that the event will address is the outsourcing of sugarcane production. Outsourcing has been successfully adopted by, among others, the Coruripe Refinery, which belongs to the Tercio Wanderley Group; and also by the U.S.’s Cargill.

In June 06, Cargill, the world's largest privately-owned company and one of the biggest agribusiness corporations in the world, put out a press release announcing its acquisition of Cevasa, “the only mill in the region of Ribeirao Preto with the capacity to expand production economically”. The company was purchased from the Biagi family.

With a 63% stake in Cevasa, Cargill is now in a joint venture with Canagril, the local association of sugarcane growers. By outsourcing sugarcane production, Cargill also outsourced the bulk of its environmental and labor concerns – two issues that have plagued the Brazilian sugar and ethanol industry.

Infinity BioEnergy, a hedge fund constituted on the London stock exchange’s lightly-regulated Alternative Investment Market (AIM), is investing in the hilly state of Espirito Santo. The Fund has announced that it “has entered into an agreement to acquire a controlling interest in two sugarcane-based ethanol production businesses in Brazil: Disa Destilaria Itaunas SA (“Disa”), an operating facility; and Pecana Empreendimentos e Participacoes SA (“Montasa”), a facility that will be operational in 2008.”

Both facilities are expected to have a joint milling capacity of 4.5 million tons of sugarcane per year. They are located within a 100-mile radius of Infinity’s other two plants, Alcana and Cridasa, purchased by the Fund in 2006.

Sergio Thompson-Flores, Infinity BioEnergy’s Chief Executive Officer, has claimed that “these acquisitions give us economies of scale to justify the development of meaningful logistical alternatives that improve the cost and efficiency of producing and exporting ethanol; the first step of which is a dedicated ethanol export terminal for which we have contracted and which is being developed by Oil Tanking in the port of Vitoria, in the state of Espirito Santo. Furthermore, the association with the Disa and Montasa shareholders and their meaningful land holdings and local relationships enhances our ability to grow in the region".

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

PANORAMA BRASIL

From now on, I will be writing a weekly column on the developments in the Brazilian ethanol market – a market which is quickly becoming global in nature, as Brazilian and foreign companies alike seek to use Brazil as a production platform for ethanol to be consumed elsewhere; as international interest surges and chiefs of state and business delegations increase the frequency of their visits to that country; and as the institutional roadblocks in Brazil that hamper the development of a full-fledged ethanol market are dodged, demolished, deflected, denied, or otherwise deducted from the general equation that will allow Brazil and other countries to sum up forces to build a backstop alternative to dwindling oil supplies worldwide.

For everyday developments and a roundup of relevant news items, I suggest visiting Ethanol Brasil, a blog by ethanol consultant Marcelo Coelho, who writes out of Ribeirao Preto, Brazil’s main ethanol-producing region.

We start this week by looking at the biggest development of all in the Brazilian ethanol industry: the visit to Sao Paulo by the U.S. government’s number two official. Dick Cheney, unfortunately, couldn’t extricate himself from his secure, undisclosed location, and Brazilian authorities had to make do with George Bush, who was badgered by requests that the 54-cent-per-gallon tariff on Brazilian ethanol be removed.

During his trip, Mr. Bush, widely seen to be touring South America to counter Hugo Chavez’s growing influence, was asked by The New York Times about the policies of the Venezuelan president.

Mr. Bush replied that “he hoped to counter Mr. Chavez’s message by espousing the benefits of free trade.

Asked by a reporter about Mr. Chavez’s ‘so-called alternative development model’ calling for nationalization of industry, Mr. Bush said: ‘I strongly believe that government-run industry is inefficient and will lead to more poverty. I believe if the state tries to run the economy, it will enhance poverty and reduce opportunity.’

He added, ‘So the United States brings a message of open markets and open government to the region.’”

Except, of course, when it comes to ethanol. Then the U.S. believes that free markets are good for other countries, but that American corn growers need the nurturing bosom of the nanny state.

While most Brazilians remain steadfastly committed to making inroads into the American market, some believe that there are many other markets to pursue. Several countries in Europe and Asia are now requiring that ethanol be blended with their gasoline, as a means of stretching out a finite resource.

Petrobras and JBIC (Japan Bank for International Cooperation), for instance, have just this week initiated talks about financing biofuels projects in Brazil. Petrobras and the Japanese bank plan to develop projects to export ethanol to Japan, said Yoshimi Tamura, a bank spokesman, to international news agencies. This comes after a set of agreements signed in September 2006, to “guarantee (…) privately-placed, yen-denominated foreign bonds issued by Petrobras, (in order to) strengthen ties with resource-rich Brazil through the use of JBIC's guarantee facility”.

Petrobras is also involved in an US$ 8 billion deal with Mitsui & Co. Ltd., which is negotiating “to buy minority stakes in 40 ethanol distilleries across Brazil, ensuring Japan a stable supply as it prepares to mandate a mix of ethanol in gasoline, Folha de S. Paulo, Brazil’s leading daily newspaper, said”.

So it appears that demand for ethanol exceeds production capacities, far surpassing what both the U.S. and Brazil can deliver. But Brazilians resent the fact that Americans associate ethanol with corn – not with the more productive sugarcane, which Brazilians have been using for over thirty years. In short, they feel they are not getting the respect they deserve, and their instinctive reaction is to focus on the American tariff and the glaring discrepancy between the talk and the walk out of Washington.

A sensible solution would acknowledge that it would probably be a good idea to get rid of the tariff on Brazilian ethanol at some point in time. Even the powerful Union of Sugarcane Growers of Sao Paulo (UNICA), in the spirit of realpolitik, acknowledges as much, stating in a press release put out on March 8^th, 2007, that “it is important to promote ethanol production in the Americas, as every country is able to produce it, whether from sugarcane, corn, or other feedstock”.

In the meantime, the U.S. has something that Brazil desperately needs: access to capital markets. The largest hedge fund operating in Brazil, Infinity BioEnergy, had to be constituted on the London bourse’s lightly-regulated Alternative Investment Market. With a market capitalization of approximately US$ 600 million, Infinity owns four plants and is considered a large fund in Brazil – but would be seen as a pittance by Wall Street analysts.

Ironing out the kinks that keep capital inflows from making their way from Wall Street into the Brazilian ethanol market would go a long way toward establishing a lot of good will in Brasilia and Sao Paulo. A robust supply chain would ensue, affording investors in the U.S. the opportunity to profit from a product whose time has come.

While that doesn’t happen, Brazilians instinctively fear that companies such as McKinsey and other information-based U.S. corporations are out to capitalize on Brazil’s 32 years of experience with ethanol, not paying a cent for all the R&D and information they are culling – R&D that was, it should be remembered, paid for by the Brazilian taxpayers, who would certainly appreciate some sort of compensation.

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

CAVEAT EMPTOR

Marcelo Coelho, on his blog Ethanol Brasil, reports that respected Brazilian journalist Luis Nassif believes there are three kinds of companies operating on the Brazilian ethanol market: the traditional sugar family companies, which are investing heavily in the expansion of their operations; the new investors, such as Felipe Reichstull, former president of Petrobras, who has been attracting huge sums of money to increase Brazilian production; and there are the speedy types, who are purchasing mills with low potential and, essentially, putting lipstick on the pig, in hopes of passing it along to unsuspecting buyers.

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