HISTORY OF ETHANOL IN BRAZIL: 1979 ISSUE OF VEJA MAGAZINE PROVIDES GLIMPSE INTO FUTURE FOR GLOBAL BIOFUELS – PART II

(For the first installment in the series, click here)

We continue our journey into the early days of Proalcool, Brazil's National Ethanol Program, with the second part of my translation of the article "The Petroleum from Sugarcane". The piece came out in the June 13, 1979, issue of Veja Magazine. The title of this second installment, "The Gordian Knot", conveys the many doubts, suspicions, and interests that surrounded the fuel's introduction.

Highlights:

* Proalcool, sponsored by the Brazilian president himself, faced considerable resistance from the middle levels of government. Four years after its legal institution through a presidential decree, the Program, half-starved of funding, still had little to show but promises.

* Joao Sabino Ometto, a representative of the traditional sugar and ethanol companies at the time and a member of the family that went on to establish Cosan, was understandably eager to see the program implemented.

* Brazilian consumers in the 1970s regarded the new fuel with suspicion, but the government ploughed ahead with Proalcool just the same.

* Brazilians blamed oil prices for the rampant inflation of those years - a fact that suggested to market researchers that there was indeed a market for ethanol.

* But, battered by a chronic national sense of inferiority, consumers doubted that any solution made in Brazil would work.

THE GORDIAN KNOT

So is Proalcool hopelessly lost in the scramble for energy? Makers of equipment for distillation plants swear that that is not the case. They guarantee that the current production figures for ethanol could have been beaten two years ago, if the government had released, in a more forthright manner, the promised funds. Such criticism is correct to a certain extent - so far, in the four years since its inception, Proalcool has used up only 24 billion cruzeiros (the Brazilian currency at the time), which is less than USD 1 billion. And, of the 228 projects that have been approved, only 104 have been actually built – 89 of them are distilleries constructed next to older, existing sugar plants. In other words, a large part of the production of ethanol is still coming from traditional sugar companies. There are only a handful of entrepreneurs participating in Proalcool, as most are discouraged by the slow pace of the disbursing of funds.

To Joao Guilherme Sabino Ometto, director of Companhia Industrial Paulista de Alcool and of Grupo Pedro Ometto – the largest individual producer of sugar and ethanol in Brazil - such slowness has a purely political explanation. “Private companies associated with Proalcool are 100% Brazilian, and, therefore, unable to exert enough pressure to force the Brazilian government to accelerate so fundamental a program”, he laments. There is no doubt that the gamut of interests surrounding Proalcool – in favor and against – has blocked its development .

And such interests may, in fact, constitute the Gordian knot that must be untied to make this new source of energy feasible. Another good reason to support Proalcool is that, from the point-of-view of the those with the most to gain - in other words, the consumers-, the ethanol alternative, although still seen with suspicion by many, would end up being easily accepted, according to specialists.

NO PREJUDICE – Regardless of the historical prejudice felt by Brazilians with regard to their own country's solutions, they would accept ethanol in the end for a simple reason: no one wants to do without automobiles.

“All the research we have conducted indicates that consumers associate runaway inflation and the rising cost of living with the petroleum problem. So we believe that there is a willingness to accept ethanol,” states Clarice Herzog, a specialist with twelve years’ experience in market research, and currently head of research at Standard, Ogilvy & Mather Advertising.

France’s Louis Dreyfus Acquires Significant Stake in Santelisa Vale, Will Mill More Sugarcane than Australia

Santelisa Vale, a company formed in 2007 after the merger of the Santa Elisa and Vale do Rosario sugar and ethanol companies, has just sold a significant stake to Louis Dreyfus Commodities Bioenergia S.A. The exact numbers have not been disclosed.

Before the deal with Louis Dreyfus was approved on Monday, April 6^th, a host of other contenders, including Sao Martinho and Bunge, had attempted to woo Santelisa Vale. At the time, offers for a 40% stake were estimated by the local business media at BRL 3 billion, or USD 1.4 billion.

Together, the two companies will have a combined yearly processing capacity of 40 million tonnes of sugarcane – more than the entire Australian output in the 2007-2008 harvest year, a paltry 36 million tonnes. In milling capacity, Santelisa Vale-Louis Dreyfus are also just a step behind Cosan, the world’s largest producer of sugar and ethanol, which milled 40.3 million tonnes in the 2007-2008 season, producing 3.24 million tonnes of sugar and 1.52 billion liters (400,000 gallons) of ethanol (see MD&A, p. 4, in Form 20-F here). One tonne of sugarcane yields, on average, 80 liters, or 21.16 gallons, of ethanol.

Santelisa Vale is choking on the debt it took on in March 2007 to finance its acquisition of Nossa Senhora do Vale do Rosario. At the time, the owners of Santa Elisa, the Biagi family, offered Santa Elisa itself as collateral and took on USD 675 million in debt from Bradesco – until recently, Brazil’s largest private bank. Now they are struggling with a debt load of BRL 3 billion, or USD 1.4 billion.

With the acquisition of a stake in Santelisa Vale, Louis Dreyfus is extending its shopping spree in Brazil. In February 2007, the company doubled its local milling capacity when it acquired four mills belonging to the Tavares de Melo Group. At Santelisa Vale, Louis Dreyfus joins a select group of investors and partners that includes Goldman Sachs, Global Foods, Carlyle/Riverstone, and Discovery Capital.

Other European players are also significantly expanding their production and trading operations in Brazil. Sucden, Tate and Lyle, Czarnikow, and Tereos, which owns Acucar Guarani, are all helping their respective countries in Europe diversify away from sugar beets.