ETHANOL FUEL ADVANTAGES DEMONSTRATED IN THE INDY 500

I worked with Tom MacDonald from April to August 2007. He has a long track record at the California Energy Commission with fuel ethanol, with knowledge about "the many energy, environmental, health and safety, and economic advantages of alcohol fuels".

MacDonald Associates continues to apply a long career experience working with alcohol fuels in California to analyzing and documenting the broader national and international potential and benefits of alcohol fuels. As another example... Today’s Indy 500, won by Brazilian driver Helio Castroneves, adds more dramatic evidence of the safety-related advantages of alcohol fuels. Graphic footage seen by worldwide audiences of the major pit fire experienced by the #14 AJ Foyt Racing team and driver Vitor Meira (also a Brazilian) illustrates several of the important differences between alcohol fuels and petroleum-based fuels that weigh heavily in favor of alcohols – further validating the selection of alcohol fuels for Indy racing following the explosive gasoline-fuel crash that claimed drivers Eddie Sachs and Dave McDonald in the 1964 500. First and foremost, today’s pit fire sequence shows the fire-fighting advantage of alcohol fuels, an advantage that should be recognized and duly appreciated by everyone involved with fuel-related fire safety. The use of water application to quickly extinguish this fire, ALLOWING THE CAR AND DRIVER TO RESUME THE RACE, would clearly not have been possible if the car had been gasoline-fueled! Secondly, the lower volatility/explosivity and lesser heat release associated with ethanol was another important factor in minimizing and containing this fire and preventing injury to the driver, the pit crew and others nearby. While the fire briefly engulfed the entire vehicle and the driver, the lesser energy release and the rapidity with which the crew was able to extinguish the fire avoided a much more serious incident that would likely have resulted from a similar mishap with gasoline. The distinct visibility of the above fire, even on the television screen in broad daylight, was also noteworthy given past safety issues involving the lower flame luminosity of alcohol fuels. The fact that the fire was instantly so visible is strong evidence that lower flame luminosity may not be as much of a concern for ethanol-fueled fires as has previously been suggested for alcohol fuels. The above incident – and various other crash sequences in today’s Indy 500 coverage – add to an accumulating body of evidence with ethanol’s use for racing fuel that, if properly assembled and utilized, can offer a compelling testimonial to the safety-related advantages of alcohol motor fuels. MacDonald Associates remains available to assist the ethanol industry and other ethanol stakeholders in efforts to better define and report on the many energy, environmental, health and safety, and economic advantages of alcohol fuels, and to help correct the misunderstandings and erroneous stories that typically affect public policy and popular views on these fuels.

Tom MacDonald MacDonald Associates Independent Transportation Energy Consultants (and California Energy Commission – retired) Sausalito California USA (916) 529-6582

(click here for video)

THE TOP 10 REASONS WHY PETROBRAS MATTERS, DEEPLY, TO THE DEVELOPMENT OF A GLOBAL BIOFUELS INDUSTRY

1. Transpetro, Petrobras' subsidiary in charge of transportation, has been piping ethanol in Brazil for over thirty years. It holds the most advanced technology in the world for such operations and is currently investing USD 1.2 billion in the construction of an ethanol export corridor that comprises a pipe grid, terminals, and large ocean vessels for ethanol. With total capacity of 12 million cubic meters per year, the project is the largest of its kind anywhere in the world. More on this - including detailed technical information - is available on Transpetro's web site (in English) here.
2. Petrobras is providing technology to a number of developing countries seeking to start a biofuels industry. In Nigeria, its is investing USD 200 million to build an ethanol production facility in partnership with the Nigerian National Petroleum Corporation, which will own 70% of the project. In Mozambique, it is working with state-owned oil company Empresa Nacional de Hidrocarbonetos to research and develop biofuels there.
3. In July 2008, its biofuels subsidiary, Petrobras Biocombustivel, was working on the development of 23 joint ventures for ethanol export - a critical move in the establishment of a global biofuels market. One of the projects, developed with Mitsui & Co., aims to export ethanol to Japan, which has authorized ethanol blends of up to 3% and is a strategic market for ethanol from Brazil and other countries.
4. Petrobras researches the development of new strains of sugarcane with higher sugar content, greater resistance to pathogens, and better adaptability to various climate and soil conditions - an essential process to jumpstart ethanol production in other tropical countries that would benefit from a biofuels industry. Research is being conducted at the company's Sugarcane Integrated Agri-Industrial Center in Quissama, Rio de Janeiro state.
5. Petrobras has research agreements with a number of foreign institutions, including the United States' National Renewable Energy Laboratory, with which it is collaborating on second generation biofuels research. The research project spans all parts of the production chain, including feedstock selection, cultivation, harvesting, and distribution.
6. Petrobras is using its expertise in Brazil, energy, and biofuels to build five ethanol plants around Brazil, in partnership again with Japan's Mitsui. The main objective is to ensure supply to the Japanese market - a pre-requisite for that country to invest in the infrastructure necessary to store, distribute, and use ethanol. The strategic importance of the Japanese market goes without saying.
7. Petrobras has biofuels partnerships with a number of key players in the global energy market, including ConocoPhillips, Portugal's Galp Energia, Italy's Eni, India's Bharat Petroleum and Oil and Natural Gas Corporation, the China National Offshore Oil Corporation, the Toyota Tsusho Corporation, Mitsui & Co., and Nippon Alcohol Hanbai. With the latter, Petrobras is planning to produce ethanol in southeast Asia for export to the Chinese and Japanese markets.
8. Petrobras is working with a number of foreign companies to open up markets for biofuels abroad, including firms like Korea's Samsung, Norway's Statoil, and the Petroleum Corporation of Jamaica, with which the company is developing a hub to trans-ship ethanol produced in Brazil and reduce its cost, as the fuel makes its way into the highly-protected US market.
9. Petrobras operates a pilot plant for second generation ethanol at its Cenpes research center. Through enzymatic hydrolysis, it was producing 220 liters of ethanol per tonne of sugarcane bagasse in July 2008. The company is currently working to develop more efficient enzymes, supplementing efforts in other research centers, in Brazil and abroad, which seek to produce cellulosic ethanol on a commercial scale. This line of research also leads Petrobras to investigate new processes for handling bagasse for use as feedstock. As Brazil is expected to produce upwards of 600 million tonnes of sugarcane this year, bagasse is considered the most viable feedstock worldwide for the production of cellulosic ethanol.
10. Petrobras is the lowest-cost producer of biodiesel in Brazil. It has three plants around Brazil and is working to develop a range of feedstocks that can be used in other tropical countries to produce biodiesel. In Brazil, it has successfully developed a production chain for castor beans as feedstock, and also uses soybeans.

US DEPARTMENT OF AGRICULTURE: BNDES FUNNELING MONEY INTO BRAZILIAN SUGAR AND ETHANOL INDUSTRY, MAY BE STOKING OVERCAPACITY

While most plants in Brazil can produce both sugar and ethanol, about 150 of the country’s 420 plants are ethanol-only operations (previous post). Most were set up during the ethanol fever that took hold of the industry post-2006, when oil prices were skyrocketing and the U.S. government embarked on an all-out to promote the use of ethanol.

Highlights on the expansion of Brazil’s sugar and ethanol industry, taken from the USDA’s recently-released report on the 2009-2010 outlook for the Brazilian sugar and ethanol industry:

Dropping sugar and ethanol prices during 2007 and 2008 and the global financial crisis in September 2008 became a major obstacle to new investments in 2009 and 2010, although investments in the sugar-ethanol sector had been growing steadily during the last few years. (Financing from the National Bank for Economic and Social Development - BNDES, the major federal bank funding new projects, increased from R$ 3.56 billion in 2007 to R$ 6.5 billion in 2008.) Credit has become scarce, to fund both sugar export operations and investments in new mills. The industry estimates that total credit to finance investments should drop from R$ 12 billion in 2008 to R$ 7 billion or less in 2009. Approximately 40 percent of the mills that were supposed to start running in 2009 (35 mills) have already postponed operations until 2010.

US DEPARTMENT OF AGRICULTURE FORECASTS BRAZIL TO MILL 605 MILLION TONNES SUGARCANE IN 2009-2010, ETHANOL EXPORTS DROP

Inquiring minds are looking at the United States Department of Agriculture's GAIN (Global Agriculture Information Network) report on the 2009-2010 outlook for the Brazilian sugar and ethanol industry.

The numbers put out by the USDA's Foreign Agricultural Service, which has an office in Sao Paulo, are in line with those published at the end of April by Conab (previous post), the agency within the Brazilian Ministry of Agriculture responsible for forecasting agricultural production in the country, and with the figures offered in early April by Plinio Nastari's Datagro (previous post), the leading sugar and ethanol consultancy in Brazil.

Highlights from the USDA's GAIN report:

"Sugarcane for crushing for MY 2009/10 is projected at 605 million metric tons (mmt), up 7 percent from the previous year, due to continuing area expansion. Sugar production is forecast to increase to 36.85 mmt, raw value. Sugar exports are forecast at 24.36 mmt, up 4.05 mmt from the previous year, due to expected lower supply from other producing countries such as India. Ethanol production for MY 2009/10 is forecast at 28.45 billion liters, while ethanol exports are expected to drop to 3.7 billion liters."

COMPARISON OF DIFFERENT PROJECTIONS
FOR CANE, ETHANOL AND SUGAR PRODUCTION
2009-2010 HARVEST YEAR - BRAZIL

	USDA	BRAZIL GOVERNMENT (CONAB)	DATAGRO
Total sugarcane for crushing (million tonnes)	605	622 – 634	598
Y-o-Y increase in sugarcane for crushing	7%	8.6% – 10.7%	5.72%
Sugar production (million tonnes)	36.85	36.42 – 37.91	35.2
Y-o-Y increase in sugar production	14%	Up to 17%	11.38%
Ethanol production (billion gallons)	7.53	7.35 – 7.57	7.38
Y-o-Y increase in ethanol production	4.6%	n/a	3.0%

Source: USDA, Datagro, Conab

DELFIM NETTO, STIGLITZ SPEAK AT EXAME MAGAZINE SEMINAR ON 2009 OUTLOOK FOR BRAZIL

Delfim Netto is a widely-respected economist and Congressman who held a number of cabinet-level positions in Brasilia in the 1960s and 70s.

On Monday, May 11, he spoke at a conference held by Exame magazine, one of Brazil’s leading business publications, and made prognostications for the Brazilian economy throughout the rest of 2009.

• The Brazilian economy will resume growth “with some vigor” in Q4, but won’t see 4% growth until 2010.
• Brazil could have seen growth of 2% to 4% in 2009 if the Brazilian Central Bank had acted more decisively and in a more timely manner.
• The Brazilian Central Bank had the wherewithal to commit more resources to staving off the crisis because it was sitting on reserves of USD 200 billion; it was also extended a credit line of USD 30 billion by the US Fed.
• The Brazilian Central Bank has been correct in its initiatives, but has been seven months late and very conservative, declining to “use its muscle to force the economy to drop to 2%, 3% or even 4% growth”.
• The Brazilian Central Bank also erred in its preferential treatment of large banks over small ones, and of public institutions over private ones.
• The recent inflow of foreign capital into Bovespa, the Sao Paulo stock exchange, can be explained by the quality of the companies traded on the exchange and the likely capacity of the country to swiftly make its way out of the downturn. So far this year, Bovespa is up 36% in dollar terms. Net of taxes and fees, that figure represents a gain of 25% in a little over four months.
• The capital inflows have contributed to a sudden appreciation of the BRL, an event that may have a “devastating” impact on the productive system.

Joseph Stiglitz, recipient of the Nobel Memorial Prize in Economic Sciences, also spoke at the conference and stated that one of the positives originating from the crisis is that it will allow Brazil to lower its interest rate to a level closer to the global average. Mr. Netto joked that doing so is of little consolation at a time when the Brazilian economy went from an excellent situation to a much worse condition.

Mr. Netto summed up the points that will help Brazil decouple from the crisis:

• Brazil is the only BRIC country to have a functional constitutional democracy.
• Brazil has a single language and no border, ethnic, and religious problems.
• Brazil can produce a considerable amount of renewable energy and has enormous oil reserves.
• Brazil has a reduced likelihood of facing a crisis in its foreign accounts, as it has substantially reduced its debt-to-GDP ratio and its liabilities in foreign currencies; it also has large reserves in hard currencies.

The Exame article closes with a quote:

“We will probably not have an energy shortage or a crisis in the balance of payments. So Brazil will be able to get out of this crisis, will be able to build a concrete road, a German Autobahn for the next 25 years. But, without the State, that will not happen. The State has its problems, but must be intelligent enough to help the private sector go down this path.”

BOVESPA, COMMODITIES BOOM LEAD US DOLLAR TO PLUNGE AGAINST BRAZIL'S REAL

The Brazilian central bank bought up dollars on Friday, May 8, in an attempt to stop the precipitous plunge of the USD against the BRL. In spite of the Bank's efforts, the USD closed at BRL 2.068, the lowest rate since October 3, 2008. This past week, the dollar depreciated 5.18%, with a 2.04% drop on Friday alone.

The ongoing boom in commodities has kept a steady stream of money coming into the country, while foreign investors poured BRL 2.061 billion (about USD 1 billion) into Bovespa, the Sao Paulo stock exchange, on May 4 and 5 alone, the month's first workdays. This flow brings the total YTD to BRL 7.719, or about USD 3.747 billion.

LACK OF CREDIT COMPROMISES QUALITY OF BRAZIL SUGARCANE FIELDS, TIGHTNESS IN SUGAR MARKETS SEEN INTO 2010

Sugar experts gathered yesterday, May 6, in New York at the ISO/Datagro Sugar Conference to discuss the outlook for the industry. The event was sponsored by the Brazilian Ministry of Agriculture, Cosan, Crystalsev, Bloomberg, and the newly-formed International Ethanol Trade Association, known as IETHA, among other organizations.

Speakers included Joel Velasco, Unica’s chief lobbyist in Washington, Sergey Gudoshnikov, of the International Sugar Organization, and a few other economists.

The outlook for sugar has improved considerably since the beginning of 2008 (chart - source: Cepea, own calculations). Indeed, the commodity was one of the few whose price did not crash in Q3 2008.

Among supporting factors is a prolonged, severe drought in the countries surrounding the Indian Ocean. Australia’s two main river systems have dried up, while the shortfall in India will lead the country to become a net importer of sugar. Indeed, according to Estado de Sao Paulo, one of Brazil’s leading dailies, Mr. Gudoshnikov of the ISO projects a supply deficit of 4.3 million tonnes for 2009. Brazilian output is expected to grow substantially, but the increase will be partially offset by declines in production in India and production issues plaguing Brazilian sugarcane fields. Thus, the tightness is expected to continue into 2010.

This outlook stands in contrast to the situation in the 2008-2009 harvest year, which saw a surplus of 6 million tonnes.

Mr. Gudoshnikov further projects that global imports in 2008-09 will total 50.2 million tonnes, compared to 45.9 million tonnes in 2007-08. He estimates availability for export also at 50.2 million tonnes, an increment of 3.6 million tonnes over the previous harvest year. Dow Jones reports that the ISO places final world inventories at 61.9 million tonnes, a drop from the 69.7 million tonnes of the previous season.

Brazilian Monster Crop not Big Enough

The tightness in supply will persist, even with Brazil’s sugarcane crop expected to reach a record 620 million tonnes, an increment of 47 million tonnes over the output of the 2008-2009 season, which drew to a close at the end of March. A growth of 35 million tonnes is expected for the following season, indicating that the expansion of Brazil’s sugarcane production is slowing down.

Lack of proper care and field renewal, associated with adverse credit and macro conditions, are responsible for the drag on agricultural production. At least 40% of the sugarcane produced in 2009-2010 will come from a fourth cutting (sugarcane plants can be cut up to seven times, with decreased sugar content in the stalks produced each year by new growth).

Fourth cuttings yield from 70 to 75 tonnes per hectare, while first cuttings have a much higher yield: 120 to 130 tonnes per hectare. In the season that has just ended, 18% of the sugarcane processed came from a first cutting; in the current season, that figure is expected to drop to 10%.

ETHANOL PRICES IN BRAZIL PLUNGE

The collapse in the price of ethanol over the past three months has been astonishing (chart). With the harvest season barely beginning, the price is the lowest it has been since Q3 2007, when the sugarcane harvest was in full swing.

Compounding the problem is the fact that the country suffers from insufficient storage capacity – a problem that the government, through BNDES, has set out to tackle (previous post). In March, BNDES announced that it would channel USD 1.1 billion towards the construction of storage facilities for up to 1.32 billion gallons of ethanol. The stated goal is to allow for a more even flow of the fuel to the market throughout the year.

DATAGRO'S PLINIO NASTARI: CALIFORNIA'S LCFS DECISION SHOULD OPEN DOORS TO BRAZILIAN ETHANOL IN FOURTEEN OTHER STATES

Plinio Nastari, founder of leading sugar and ethanol consultancy Datagro, believes that the recent decision by the California Air Resources Board (CARB) to approve the Low Carbon Fuel Standards sets the stage for a number of other states to pass similar legislation, with the goal of reducing carbon emissions through the use of clean-burning fuels, like sugarcane ethanol. Mr. Nastari's estimates show that the expansion of the markets for Brazilian ethanol represents about 30% of the total US market for gasoline.

According to a Brazilian business newspaper, Mr. Nastari believes that, "the United States will have to import sugarcane ethanol because (the production of) corn ethanol will not be enough, nor is corn ethanol clean enough to meet the standards approved in California", where the goal is to promote a 10% reduction in the carbon intensity of all fuels by 2020.

BRAZILIAN 2009 ETHANOL EXPORTS TAKE A TUMBLE IN Q1

A local newspaper reports that the southern state of Parana, Brazil's second-largest producer of ethanol, exported 174 tonnes of ethanol in the first three months of 2009, representing sales of USD 87,646. Over the same period in 2008, exports reached over 75,000 tonnes, which brought in USD 39 million. The blow from this precipitous drop in exports, laid down to the global economic recession, was softened by higher prices for sugar. The data come from the federal government's Agency for International Trade, known as Secex.

The same agency reports that, of the ten products leading the state's exports, only three saw an increase in volumes over Q1 2008. Strong sugar sales to international customers helped make up for the loss of revenue from ethanol. In Q1 2009, sugar exports climbed from 299 thousand to 476 thousand tonnes, representing sales revenues of USD 137 million - a 71% increment over the same period for 2008.

CONAB: BRAZIL TO CRUSH MORE THAN 620 MILLION TONNES OF SUGARCANE IN 2009-2010

Conab, a Brazilian government agency that is part of the country’s Ministry of Agriculture, has just released its estimate for the production of sugarcane in the 2009-2010 harvest year.

This first assessment (the agency conducts a total of three throughout the year) projects that Brazil will crush between 622.03 and 633.72 million tonnes of sugarcane between now and the end of the harvest season, in Q2 2010. This volume sets a record and represents an increment of between 8.6% and 10.7% over the previous harvest season’s output, which saw production of 572.57 million tonnes.

According to the agency, one significant factor pushing up volumes is a total of 28 million tonnes of sugarcane left over from the 2008-2009 harvest season and that are expected to be milled this year. Area under sugarcane cultivation has also grown 9.9%, an expansion associated with 25 new plants coming on-stream.

Until last year, sugarcane plantations for sugar and ethanol production occupied 7.08 million hectares (17.49 million acres); this year, the figure is expected to jump to 7.79 million hectares (19.24 million acres).

Sugarcane for all uses (which includes the production of forage and spirits) grew from 9.4 million hectares (23.22 million acres) to 9.59 million hectares (23.69 million acres). This may bring the total of sugarcane produced in the country to 674.8 million tonnes. The head of Conab, Wagner Rossi, stated that, “this proves that the sugar and ethanol market remains strong, in spite of the economic crisis”.

It should be noted, however, that a part of the crop may not be processed, due to factors like precipitation, the availability of harvesting equipment, and issues related to infrastructure.

The states of Brazil’s Center-South region account for 90% of sugarcane processed, with the balance milled in the states of the North-East. In the Center-South, Sao Paulo state leads, with an expected production of between 360.41 and 367.69 million tonnes, or about 58% of all the sugarcane that will be processed.

Other states have seen significant progress: Goias state, also in the Center-South region, has an increment this year of 527.6 thousand hectares, or 31.3% over the previous total; Mato Grosso do Sul, further west, has an additional 335.1 thousand hectares, equal to 21.5% of the past year’s figure.

All the states of the Center-West region (Mato Grosso, Mato Grosso do Sul, and Goias) have witnessed combined growth of 20.5% in sugarcane area, reaching a total of 1.09 million hectares (2.69 million acres). Production follows a similar trajectory, with 30% added output (85.29 million to 87.01 million tonnes).

Plantations in the country’s South (which comprises the states of Parana, Santa Catarina, and Rio Grande do Sul) are expected to grow 18.3%, occupying 644.3 thousand hectares (1.74 million acres). The amount of cane used by sugar and ethanol makers is expected to reach between 53.24 and 54.31 million tonnes.

Parana state stands out in this expansion process – it is now the second-largest grower, producing an expected 53.1 million tonnes to 54.2 million tonnes – practically the entire output of the region. This figure places it behind Sao Paulo and ahead of Minas Gerais state, which will mill from 50.8 million and 51.8 million tonnes.

Sugar and ethanol mix changes

The amount of sugarcane marked for the production of sugar may grow by up to 17%, while that used for ethanol is expected to grow 7.7%. With this mix, Brazil will produce between 36.42 and 37.91 million tonnes of sugar and between 27.78 and 28.6 billion liters (7.35 million and 7.57 million gallons) of ethanol, with a breakdown between anhydrous (used for blending with gasoline) and hydrous (sold directly at the pump as E100) of 33% anhydrous to 67% hydrous.

Drivers that have spurred producers to favor sugar over ethanol include depressed prices for ethanol on the Brazilian domestic market, difficulties in exporting caused by tariffs and subsidies to inefficient agricultural systems in formerly-rich nanny states in North America and Europe, and a shortfall in production in countries around the Indian Ocean that was motivated by drought and that has made India a net importer of sugar. A strengthened dollar has also made international prices more attractive for sugar.

These projections were developed using satellite imagery from Canasat, a project sponsored by Brazil’s National Space Research Institute, by the University of Sao Paulo, through the Center for Advanced Studies in Applied Research, known as Cepea, by the Center for Sugarcane Technology, known as CTC, and by Unica.

BRAZIL ETHANOL PRODUCERS PLEASED WITH LCFS DECISION BY THE CALIFORNIA AIR RESOURCES BOARD

A series of initiatives to ensure that Brazilian producers have greater access to foreign markets are coming to fruition. Unica’s lobbying efforts in California are a case in point: on April 24, the California Air Resources Board “vote(d) to recognize sugarcane ethanol’s carbon reduction levels”, recognizing that “sugarcane ethanol’s carbon intensity is even lower than initially calculated” by the Board. Unica believes that the “decision means sugarcane ethanol will be in greater demand in California in the years to come”.

The CARB resolution caps the efforts initiated by Unica around the year 2000, when the organization’s officers, including former president Eduardo Pereira de Carvalho and Alfred Szwarc, its point man for emissions and technology, began making regular pilgrimages to California, where they met with officials at different state government agencies and laid the groundwork for CARB’s decision in April.

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.

History of Ethanol in Brazil: 1979 Issue of Veja Magazine Provides Glimpse into Future for Global Biofuels

("Will It Work"? This 1979 edition of Brazil's Veja Magazine reveals the hopes and doubts surrounding the introduction of ethanol in the country)


Veja Magazine has been the main Brazilian news weekly since 1968, a kind of Time Magazine and Newsweek rolled into one. It is printed on glossy paper with easy-to-digest information, presented in articles that span from one to four pages.

Veja does a good job of capturing the Brazilian zeitgeist. So I decided to go back and check issues from the 1970s, when the Brazilian National Ethanol program, Proalcool, was being instituted.

What did Brazilians think of the program back then? What was the government’s strategy to introduce a novel fuel to the world’s tenth-largest economy, a country with a population of 120 million at the time? What were the roadblocks and pitfalls?

Below is the first installment of a series of translations of Veja articles from that time. It makes for a fascinating read, as we encounter the exact same doubts, gripes, and motivations, both declared and undeclared, that we are witnessing today on a global level.

Petroleum from Sugarcane

Go to original

After years of hesitation, the Brazilian government has decided to make up for lost time and institute ethanol as the best alternative for the future.

June 13, 1979

It would be, in the opinion of its enthusiastic defenders, a sure passport to a problem-free energy future. And with formidable powers to single-handedly solve a good chunk of the country's problems, doing away, in one fell swoop, with the dark clouds that hover over the automobile industry, the balance of trade, the unemployment rate and inflation. But, in spite of all these qualities, the National Ethanol Program (Proalcool) will remain a vague promise, far from an effective path to rid Brazil of the petroleum nightmare.

Born in 1975, Proalcool ended up having to wait for an unfettered, disorderly break-out of petroleum prices that threatens to shake the Brazilian trade balance, this year with a likely shortfall of approximately USD 7 billion – about 50% of imports – to receive hope from the government. Such was the winning intention at last Wednesday’s meeting of the Council for Economic Development (CDE) in Brasilia, when new, ambitious goals and resources were added to the plan.

GLOBAL CONCERN – “This time, we won: the CDE has cinched the deal and there is no turning back now from Proalcool”, the Minister for Industry and Commerce, Joao Camilo Pena, said to a friend, as he left the meeting in a state of euphoria. In fact, the CDE decided to invest USD 5 billion in Proalcool, until the end of the Figueiredo administration (1979-1985), in order to reach an equally-ambitious number: 10 billion liters (2.64 billion gallons) of ethanol per year. With such a volume, the government expects to meet, over the following six years, additional demand for gasoline, while fully supplying 475,000 vehicles with adapted engines and 1.225 million others with a factory-made ethanol-powered engine.

Cautious, many technical personnel believe that it would be more realistic to cut the approved goals by half. Likewise, among economists, businessmen, and consumers, there is no lack of people who are relatively cool to the measure. And such an attitude is hardly surprising. After all, this is not the first time that, after a CDE meeting, ministers of state proclaim the beginning of a new energy phase in Brazil. In January 1977, for example, then-president Ernesto Geisel, at a meeting of the same Council, supposedly assigned absolute priority to Proalcool – “with unlimited funds”. However, three years after its creation, weak statistics flow from Brazil’s distilleries. Doses that are, without a doubt, below the national thirst for fuel in a country that consumes 1 million barrels of oil per day, 85% of which is imported. For this year’s harvest, for example, billions of liters of ethanol for blending are expected to be produced. They will be added, at a 20% grade, to the 15 billion liters of gasoline consumed by the 7 million vehicles in the Brazilian fleet. And, even if the goals set by the CDE materialize in 1985, the situation would not change things substantially, pessimists contend.

(to be continued)

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.

American Ag Consultant in Brazil Shows the Way to Foreign Investors

My friend Kory Melby lives in Brazil's Center-West, the country's agricultural heartland.

He has been showing foreigners around the region for a number of years, looking for good deals in farmland. He offers "private consulting services for hedge funds and private investors, keeping them abreast of the latest Brazilian updates on soybeans, cotton, cattle and land prices".

Kory has "over seven years' experience in the agriculture sector in Brazil. (He has) traveled extensively in the agriculture regions of the country and (has) built up and established a network of knowledgeable contacts".

Here’s one of his most recent posts:

March 14, 2009

Back in Goiania (capital of Goias state).

I covered 2000+ km of Mato Grosso (state) last week.

2nd crop corn and cotton look good.

Rainfall totals for central Mato Grosso are at 1400 mm as of March 14th. Normal is 2000 mm for this date.

The rainy season will end by the end of April. Normal rainfall amounts are 2200-2400 mm for the season.

As long as rains come for another 6 weeks, the 2nd corn crop should be fine. If rains end early, then yield problems will show up.

Soybean yields were as expected for most producers: 50 sacs or 44.5 bushel per acre.

Cash price for soybeans are about US$ 7.00 per bushel basis central Mato Grosso.

Everyone is in survival mode. They know they are not going to make much money this year. They know it will be tough sledding into 2010. Credit is expensive. All banks want 2% per month or more. One producer said he made his payments to the bank, and now the bank does not want to lend the money back out again.

Local coops are offering 2010 soybean packages for 22 sacs of soybeans per hectare for trading. This includes fertilizer, seed, and chemicals. This is not too bad.

Read the rest of his analysis here.

He also provides a translation of an article that just came out in Gazeta Mercantil, titled, “Land Prices Surprise with Full Recovery in Crisis” (Gazeta Mercantil is the Brazilian equivalent of The Wall Street Journal – minus the Murdoch stigma).

Cheap Ethanol, Expensive Sugar Change Game for Brazilian Producers

Brazilian consumers are up in arms against what they perceive as price gouging by fuel ethanol distributors and retailers: since the end of January 09, prices paid to producers in Brazil's Center-South region have fallen by 13%, from USD .3831 to USD .3329 per liter (USD 1.448 to USD 1.258 per gallon) (source: Cepea). But these savings have yet to be passed on to consumers.

The drop is happening right in the middle of the sugarcane off-season, when prices have historically been at their peak. With little storage capacity to secure a more even flow of ethanol throughout the year, supply is strongly conditioned by the availability of sugarcane for processing. This fact usually causes prices to bottom out at the height of the harvest season, which lasts roughly from April to October in Sao Paulo state, the country's main sugar- and ethanol-producing region.

This year's season has yet to begin, but prices paid to producers are at levels last seen in June 08, when the sugarcane harvest was in full swing. Folha de S. Paulo, Brazil's leading daily, reports that,

"At some fueling stations in Sao Paulo state, the difference between ethanol prices at the pump and prices paid to producers at factory gates reached 105% the week of March 16. On average, the difference was 79%."

This apparent mismatch may be laid down to a high degree of operating leverage in the fuel distribution chain, much of which results from the gross inefficiencies that mark the industry. Further, many companies are buying out of the hype that promised to make Brazil an energy powerhouse one day and focusing instead on the shorter term. The net result is that producers are expected to favor sugar over ethanol; in fact, many are now dumping ethanol inventories to raise cash in preparation for increased sugar output.

Ethanol prices may be collapsing, but the outlook for sugar looks increasingly bullish. India, the world's second-largest producer, is expected to see a shortfall in production of some 4 million tonnes. The European Union, induced by government policy reforms, is also expected to produce less. These and other changes are projected to lead to a global deficit of between 5 million and 10 million tonnes of sugar this year.

Brazil, which in the 2007-2008 season harvested a record 493 million tonnes of sugarcane, up 16% from the previous season, produced 30.7 million tonnes of sugar and 22.5 billion liters of ethanol over the same period (source: Unica. Note: figures for the 2008-2009 season have yet to be tallied). The country's capacity to sway markets for both commodities is illustrated by the recent performance of Cosan, Brazil's largest sugar and ethanol concern. In the in 2008-2009 season, it processed 44.2 million tonnes of sugarcane, more than the entire output of Australia during the same period: a comparatively piddling 36 million tonnes.

An estimated USD 20 billion, from Brazilian and foreign sources, has been invested in capacity expansion over the past four years. As a result, agricultural output has ballooned, with another surge in sugarcane production expected this year.

While more producers will almost certainly prefer sugar over ethanol, the precise mix will be determined by market forces shaping up amid the global economic meltdown. On the supply side, the ability of companies to secure access to credit lines (a very iffy proposition right now) will be of fundamental importance. From a demand perspective, the speed at which developed countries with ethanol blending requirements rebound from the current crisis (if at all) will be just as decisive.

Of course, speculators also have a role to play. Reuters reports that, in May 2008, Peter Baron, executive director of the International Sugar Organization, predicted that:

"The tremendous flow of capital from financial institutions into commodity futures to seek diversification away from the sectors affected by the credit crunch has clearly pressured fundamentals. It is clear that the net inflow of funds in sugar futures is a decisive driver for today's world prices."

That theory, of course, went out the window with the collapse in commodity prices in Q3 2008. It may become valid again if financial players rush back into commodities, as Marc Faber, Jim Rogers, and many others have been prognosticating (incidentally, Jim Rogers' old partner in the Quantum Fund, George Soros, is one of the investors in Adecoagro, which has plans for a combined four plants in Brazil - one in Minas Gerais state and three in the state of Mato Grosso do Sul, in the country's Center-West).

While switching to sugar may be a way out for many producers in Brazil, a sizable share of the new projects that have come on-stream can produce only ethanol. These companies are taking a severe beating, as the players that produce both commodities continue to dump ethanol inventories to raise cash. (According to the Brazilian Ministry of Agriculture, the country has 420 plants: 248 produce both sugar and ethanol, fifteen produce only sugar, and 157 produce only ethanol).

In short, rising sugar prices, tight credit, and massive overcapacity do not bode well for ethanol prices. Many producers, including the much-feted Santelisa Vale, are now being forced to look for partners with greater financial heft - or fold.

-Henrique Oliveira

Brazilian Government to Finance Ethanol Inventory Build-Up

The Brazilian sugar and ethanol industry is getting pummeled by a series of outside shocks associated with the global economic downturn. First, the drop in oil prices over the past six months has taken much of the steam out of initiatives to further the world's single proven, economically-viable alternative to gasoline - namely, sugarcane-based ethanol. A GP at a fund with a sizable investment in a major ethanol operation in Brazil told me last June that his worst nightmare was oil falling back to USD 40. Wonder what he felt when it dipped into the low thirties.

Second, credit has tightened up in Brazil, as is the case everywhere else. Mill owners in the Ribeirao Preto region were said to be hawking their neighbors' properties to outside investors, in a desperate attempt to convert their insider connections into cash. Not a strategy likely to succeed, what with private equity running for the hills, most major corporate projects canceled or postponed, and FDI overall slowing to a trickle.

In an attempt to stave off the worst effects of the ongoing financial and economic drama, BNDES, Brazil's national development bank, is now funneling billions of dollars into the industry, much to the delight of organizations like Unica, the association of sugarcane growers of Center-South Brazil; Abimaq, the trade group that represents Brazilian manufacturers of heavy equipment, used to harvest, crush, and process sugarcane; and the Brazilian Agribusiness Association, known as Abag, which speaks for a mixed bag of farm-related industries that includes ADM, BASF, Bunge, Cargill, DuPont, John Deere, Syngenta, and Monsanto.

On March 20th, BNDES announced that it would finance the expansion of ethanol storage capacity, a crucial bottleneck blocking the development of the industry. Without large-enough facilities to store ethanol, companies are forced to sell it as soon as it is produced, depressing prices near the harvest season, which begins in Q2 in Brazil's Center-South region. Prices then normally rebound in Q3, a few weeks after the bulk of the region's sugarcane has been brought in and processed into ethanol and sugar.

This past season, however, the economic crisis has dampened demand abroad. Overcapacity built up in 2006-2008 has further pressured prices, which have remained at levels near their harvest season lows. BNDES is now stepping in to offer a credit line of BRL 2.31 billion, or about USD 1 billion, for inventory build-up, in the hope that more regular supply throughout the year will alleviate problems stemming from wildly-fluctuating prices and working capital requirements, both of which hamper companies' ability obtain financing in capital markets, in Brazil and abroad.

-Henrique Oliveira

Economic Hard Landing Abroad Threatens Expansion of Brazil's Ethanol Industry

The issue of whether the Brazilian economy can decouple from the fate of the economies of the U.S. and Europe remains a nagging one, with many economists and academics arguing that other countries would pick up the slack in the event of an OECD-led economic slowdown. However, as any contraction in money markets abroad would directly impact the dozens of joint ventures and greenfield projects currently being developed in Brazil's ethanol and sugar industry by foreign companies, understanding the extent to which the Brazilian economy and those of the more developed countries are connected seems prudent.

The Ministry for Development, Industry and Foreign Trade points to the diversification of Brazil's portfolio of trade partners and to the increase of commerce with China as a counterpoint. But the United States still took in an estimated 15.8% of Brazilian exports in 2007, while China acounted for 6.9%. Further, in the case of dampened demand in the U.S. for Chinese products, the Brazilian commodities sector - which has seen massive capital expenditures over the past few years, including a number of acquisitons abroad by companies like Vale - would probably take a hit. Risky undertakings in Brazilian biofuels would likewise feel intense pressure, as it is not clear whether financing from abroad would be forthcoming.

In fact, Unialco, a well-run sugar and ethanol operation in the interior of Sao Paulo state, attempted to float USD150 million dollars in bonds, but gave up when Standard and Poor's gave the company a B ("Very speculative") rating. While recognizing that the long-term prospects for Brazil's sugar and ethanol industry look good, Standard and Poor's also noted that the cyclical nature of Unialco's business, which generates weak cash flows during the off-season (November-April) and requires substantial increases in working capital during the harvest (May-October), raises the riskiness of the business - a problem, notes S&P, inherent to all commodities.

The need for electricity produced by distilleries from burning bagasse (crushed sugarcane) should also bode well for the medium term - Brazil faces a looming power shortage, the result of a complex set of factors that includes natural gas disruptions from Bolivia, shortages in Argentina, and less-than-expected precipitation that resulted in low levels at the dam reservoirs that account for approximately 70% of all the electricity generated in Brazil. However, it is not clear that all the investments in bagasse-based generation will come on-stream in time to stave off shortages.

A modern refinery today derives around 10% of its income from the sale of excess power to the public grid. As most sugar and ethanol companies are located in the state of Sao Paulo, also home to the bulk of Brazil's industry, disruptions to ethanol projects would affect the delicate balance of (electric) power that keeps both mill owners and industrialists happy. Their support is essential to the stability of the administration of President Lula, who started out his political career as a union leader on the industrial outskirts of the city of Sao Paulo in the late 1970s. A power shortage now would tarnish his economic credentials, which have never shone as brightly.

Estimates Vary for Total Investments in Brazil Ethanol Sector

When summing up expected investments in new ethanol- and sugar-producing capacities in Brazil, the numbers shift from day to day and from source to source. Dow Jones reports that, in April 2007, BNDES, Brazil’s national development bank, put the figure for the 2008-11 period at 89 projects requiring USD13.1 billion in investments. Unica, the Association of Sugarcane Growers of Brazil’s Center-South, talks of 86 plants, with slated expenditures of USD17 billion. The Vice-President of Morgan Stanley’s research division, Subhojit Daripa, on his turn, speaks of a total of USD33 billion in new investments planned both for the development of greenfield projects and for the expansion of existing plants.

Looming over the sector, Petrobras, the Brazilian state-owned energy company, is a wild card that may sway the development of the industry one way or the other. It has announced a partnership with Japan’s Mitsui to build forty “bioenergy complexes”, as well as two dedicated ethanol pipelines from Goias state, deep in Brazil’s interior, through traditional sugarcane-growing regions in the northwest of Sao Paulo state and on to terminals on the Atlantic.

However, as a cursory examination of Brazilian history shows, talk is cheap and the way things turn out will be determined by the economic fundamentals of Brazil’s energy sector. Petrobras recently announced the discovery of a massive ultra-deep offshore field with ultimately recoverable reserves of between four and six billion barrels of light, 28-degree API oil. That the company will be tempted to shift assets – especially human resources – to this project and away from ethanol and its incipient biodiesel program should not come as a surprise to anyone.

In 2007, according to the Ministry of Agriculture, Brazil produced just under 15.8 billion liters of ethanol – a number that works out to approximately 182,407 barrels of gasoline equivalent per day. Before the announcement of the discovery of the new superfield, Petrobras already produced 2,000,000 boe/day, or about eleven times more than all the ethanol produced in Brazil.

No further math required to figure out what tops the list of priorities of Brazil’s federal energy policy, of which Petrobras is the best-known, and most active, instrument.

A further degree of uncertainty is added by the fact that producers could easily switch from ethanol to sugar production, if the prices of sugar were high enough (right now, they aren’t). But unforeseen circumstances in Australia, India, and other big sugar exporters can change the picture and leave ethanol consumers – in Brazil and abroad – high and dry, as happened in 1989, when the sector became deregulated and an ethanol shortage ensued on the domestic market. The fiasco led millions of motorists to queue up at fueling stations and to lose faith in the federal fuel ethanol program, begun in 1975.

Not only can the switch to sugar alter the numbers for ethanol, but a "black" and "gray" market, caused by unequal tax regimens between states and lax surveillance in most parts of Brazil, severely distorts the playing field by encouraging tax evasion and product adulteration. Sindicom, the Brazilian national association of fuel retailers, estimates that this “informal” market may comprise as much as 40% of the total of fuel ethanol sold in Brazil.

So the announcement of new investments in Brazil's sugar and ethanol industry must be weighed against the marginal cost of talk (zero); only a thorough examination of all the underlying political, economic, and social factors can result in a rough understanding of how much ethanol Brazil produces right now. How much it will produce in a few years’ time is anybody’s guess.