BRAZIL ETHANOL SURVEY TRIP WEEK ONE

After arriving from Michigan at Guarulhos International Airport near Sao Paulo on April 27^th, 2007, I ran to the gate for my connecting flight to Belo Horizonte, the city of three million where I am conducting a broad, in-depth survey of the Brazilian ethanol market. There I was greeted by the most recent of the infrastructure malaises that affect Brazil: the “airport blackout”, a quasi-strike by Brazilian air traffic controllers that kept my plane on the ground for over four hours.

These delays have become a fixture in Brazilian air travel, ever since an Airbus was downed over the Amazon in September 2006 by a freak collision with a private jet. Blame was ultimately assigned to the overworked, underpaid air traffic controllers, who felt stung and decided to follow the air traffic control rules to the letter, effectively slowing down take-offs and landings. The extended waits in airport lounges add to the price of doing business in Brazil, but also offer the opportunity to get to know your fellow sufferers a little better.

So it was that I met an executive from CVRD (Companhia Vale do Rio Doce), the largest producer of iron ore in the world – so big, in fact, that it has started its own air service to shuttle its executives from one Brazilian city to the other, in an attempt to remedy the intractable air traffic control problem.

The same CVRD executive told me that the company, who he says consumes 15% of all the electricity generated in Brazil, is also planning to build its own power generators – a fact that speaks to the capacity of private investments to bypass the ossified structural problems that have long hampered Brazil’s growth. Whether the problem is the sub-standard highway and railway system, ports with insufficient storage capacity, or inefficient distribution systems, large capital injections are often an efficient way to solve it.

A flood of foreign dollars has sent the real, the Brazilian national currency, soaring nearly 5% over the past month. The high interest rate paid out by the Brazilian federal government, undervalued assets on the Sao Paulo exchange, and a steady stream of direct investments (especially in the hard assets / commodities market) have led to an oversupply of dollars. The strong real is now playing against Brazilian exporters, who have been clamoring for the Brazilian government to set a floor of two reais to the dollar – with no success. Today, one American dollar buys 1.96 reais – just four weeks ago, it bought 2.11.

In the following weeks, please check back for updates on my four-month trip to survey the Brazilian ethanol market for MacDonald Associates and the William Davidson Institute at the University of Michigan.

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