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.

Consolidation in Brazilian Ethanol Industry Aided by Low Asset Prices

Ethanol prices traditionally fall in April, when the harvest season in Brazil’s main sugarcane-growing region, the Center-South, picks up. This year, the drop was more severe and lasted longer than in previous seasons, as capital expenditures in installed capacity, a bumper crop, and a shift away from sugar to ethanol production all kicked in to send the price of the fuel from USD0.55 to USD0.35 per liter over a six-week period between April and June.

Now the season has come to a close in Brazil’s Center-South, which includes the states of Sao Paulo and Minas Gerais, responsible for 75% of all ethanol produced in the country. Prices have once again gone up, allowing companies to take profits – but the damage done by the very low prices that prevailed throughout most of the year, coupled with even-lower sugar prices on the international market, may have long-lasting effects. For one, they meant drastically-reduced cash flows - bad for all producers, but lethal for smaller entrants to the market, many of which had hoped to finance the next year of activities with cash raised by selling ethanol produced this year.

Consequently, many properties are up for sale. Gazeta Mercantil, one of Brazil’s leading financial dailies, reports that prices for installed distillery capacity are about 25% of what was being asked just a few months ago, when prices were at their peak. As many owners did not have the financial heft to wait out the slump, and are not willing or capable of sticking around to see what ethanol and sugar prices will be like in the coming two years, they are now forced to sell for pennies on the real.

Also, according to Gazeta Mercantil, PriceWaterhouse Coopers says that 34 deals involving distilleries were executed in 2007 – nine of which were acquisitions (i.e., either a controlling stake or the entirety or the company was transferred to the new owner) and fifteen, joint ventures. This total was twice the number tallied in 2006, when 19 deals were closed, according to Fabio Niccheri, Director of M&As at Pricewaterhouse.

The highly-fragmented industry, in which 200 companies own about 400 distilleries, is thus undergoing a process of consolidation that may lead the sector to look very much like the soybean-growing region of Center-West Brazil, located at the very geographic center of the South American continent. According to The McKinsey Institute, the Brazilian soy industry is the largest in the world; however, vital products, such as seeds, pesticides, and machinery, and services, like financing, distribution, and logistics, are dominated by a chain with few key players.

The Center-West became an agricultural powerhouse when Brazilian agronomists, centered at Embrapa, a federally-funded R&D facility, developed a method to correct the highly-acid soil underneath Brazil's vast savannas, called the Cerrado. An influx of small farmers built the economic bases of the vast soy economy, so large that it straddles the Brazilian border and spills over into Bolivia and Paraguay, forming the so-called "Republic of Soy".

As the soy industry consolidated throughout the 1980s, a few Brazilian groups emerged at the head of the pack. After the Brazilian economy opened up in the early 1990s, these groups teamed up with large foreign agricultural concerns, sparking fears associated with overdevelopment and prompting a litany of protests, litigation, and judicial action in remote corners of the country.

Many lessons can be learned from the recent development of the soy industry, chief among them the necessity to adopt strict corporate governance and environmental standards to enhance the capacity of the industry for growth. As the pace of consolidation picks up in the sugar and ethanol sector, getting companies in the much more visible Center-South to adopt such codes is a prerequisite for a successful expansion.

BRAZIL ETHANOL MARKET SURVEY PHOTOLOG 3

Pictures 1 and 2: Tom and I at a fueling station talking to the manager. Upon request, he tested a small sample of gasoline. All gasoline sold in Brazil (for any kind of Otto-cycle combustion engine - cars, boats, etc.) is required to have between 20% and 25% anhydrous ethanol. The exact amount is determined by government regulation and changes throughout the year, according to the supply of ethanol on the domestic market. Dishonest distributors and station owners, however, adulterate the product by adding ethanol above the legally-permitted limit (credit: Picture 1: Tom MacDonald).


Picture 3: In this case, the sample, which is always collected from the pump in the presence of the customer, contained 75% gasoline and 25% anhydrous ethanol, meeting government specifications.

From April to September 2007, I traveled around Brazil comparing the Brazilian and American biofuels market. In August I was joined by Tom MacDonald, senior alcohol fuels specialist with the California Energy Commission. All photos shown on Ethablog were taken during that time.

BRAZIL ETHANOL MARKET SURVEY PHOTOLOG 2

At the Ribeirao Preto branch of the Instituto Agronomico de Campinas (IAC), talking with ethanol consultant Marcelo Coelho (left), from E-machine Engineering, Procurement, and Construction, who kindly arranged the visit. Prof. Antônio Carlos Vasconcelos, one of the world's leading scientists in sugarcane genetic enhancement, stands in the middle. (Picture: Tom MacDonald)
The IAC keeps a living collection of all the sugarcane varieties ever grown in Brazil, from Saccarum officinarum, planted in the country since the 1500s, to the IACSP strains it is cultivating to provide higher sucrose content, better resistance to disease and pests, and superior adaptability to new soils and climates.

From April to September 2007, I traveled around Brazil comparing the Brazilian and American biofuels markets. In August I was joined by Tom MacDonald, senior alcohol fuels specialist with the California Energy Commission. All photos shown on Ethablog were taken during that time.

BRAZIL ETHANOL MARKET SURVEY PHOTOLOG 1

Picture 1: Swimming in the huge Balbina hydroelectric dam reservoir, 100 km northeast of Manaus, deep in the Amazon forest.

Picture 2: Dead trees from when the reservoir was created in the 1980s. The Brazilian government is planning two new dams on another river in a nearby state.

From April to September 2007, I traveled around Brazil comparing the Brazilian and American biofuels markets. In August I was joined by Tom MacDonald, senior alcohol fuels specialist with the California Energy Commission. All photos shown on Ethablog were taken during that time.

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.

VISIT BY GERMAN PRESIDENT TO BRAZIL IN MARCH UNNOTICED

German President Horst Kohler’s visit to Brazil in early March 2007 was eclipsed by the simultaneous arrival of U.S. President George W. Bush. In spite of the short shrift given by the Brazilian and international media to Mr. Kohler’s visit, Agencia Brasil, the Brazilian government’s news agency, reports that the German president’s presence prompted Lula to “invite German businesses to invest in energy and infrastructure in Brazil”.

Agencia Brasil goes on to specify that “President Lula invited German businessmen to participate in the Growth Accelaration Program (“Programa de Aceleracao do Crescimento” – PAC).

During a reception for President Kohler at the Palacio do Planalto, in Brasilia, Lula said that German businesses should invest in the PACs because these companies have proven competence in the energy field.

According to Lula, the Germans, who invest US$ 9 billion yearly in Brazil, are the sixth-largest national group of foreign investors. He also pointed out that 1,200 German companies have a branch on Brazilian territory and, together, represent 8% of Brazil’s GDP.

Germany is Brazil’s largest European trade partner. In 2006, trade between the two countries totaled over US$12 billion. Brazil exported US$ 5.5 billion to Germany, while the latter imported US$ 6.5 billion from Brazil.

The state dinner offered to the German President had to be rushed, so that he could return to Sao Paulo one hour before the arrival of President George Bush in that city. The following day, Mr. Kohler remained in Sao Paulo and followed the intense activity around the signing of a bilateral ethanol agreement between the U.S. and Brazil.

Brazil and Germany have a long history of shared traditions. The country received a large influx of German immigrants in the second half of the nineteenth century and the first decades of the twentieth.

The immigrants established themselves mainly in the south of Brazil, in the states of Sao Paulo, Parana, Santa Catarina and Rio Grande do Sul.

Figures such as Jorge Bornhausen, Lauro Muller, Adolfo Konder, and Filipe Schmidt have left their mark on the Brazilian political landscape. Other German descendants were closely involved in the development of the Brazilian ethanol automotive fuel industry: Col. Ernesto Stumpf invented a special Venturi carburetor for ethanol-powered internal combustion engines in the 1950s (earlier post), and President Ernesto Geisel (1974-78) started the Pro-Alcool (Pro-Ethanol program) in 1974.

More recently, David Zylberstajn and Henri Philippe Reichstul, directors of the newly-established Brenco (Brazilian Renewable Energy Company – earlier post), have sealed alliances with international organizations to further develop the Brazilian sugar and ethanol industry.

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

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.

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.

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.

DOW JONES NEWSWIRES: BRAZIL ETHANOL CAN REPLACE 10% WORLD GASOLINE IN 20 YRS

My comments on the piece below:

The large sums described in the article below will probably arrive in the form of either direct foreign investments, such as those made by Cargill and A.D.M. in 2006, or via hedge funds, like Infinity BioEnergy and Clean Energy Brazil.

These investments may soon make their way toward the development of ethanol-related projects in Brazil and other tropical countries. Investors should, however, be able to navigate the choppy waters of Brazilian business, which, though bearing a resemblance to its American and European counterparts, is different in many regards.

If any disputes arise, for instance, foreigners will discover that recourse to the law exists and generally works, but may take a maddeningly long time. Solving this and other medium-term institutional roadblocks, then, is of paramount importance to Brazil if it wishes to attract large foreign investments (which may have to come anyway, for lack of energy alternatives).

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Go to original

By Grace Fan, Dow Jones Newswires
5511 3145 1489; brazil@dowjones.com

SAO PAULO (Dow Jones)--If the right investments are made, Brazil could replace 10% of the world's gasoline with its bio-friendly cane-based ethanol in 20 years' time, according to a study conducted by a university in Sao Paulo at the request of the country's Ministry of Science and Technology.

However, "what will be necessary is the investment of BRL20 billion ($9.5 billion) per year until then to do so," Luis Augusto Barbosa Cortez, the vice-coordinator of the study at the State University of Campinas, or Unicamp, said Monday in a phone interview with Dow Jones Newswires.

The study has been conducted over the past two years at University of Campinas with participation by Transpetro, the distribution branch of Brazil's state-owned oil firm, Petroleo Brasileiro SA (PBR).

About 20% of the BRL20 billion per year will be needed to invest in ethanol infrastructure, such as warehouses, ethanol-dedicated pipes and improvements in ports, he said.

The rest will be needed to construct new mills as well as to purchase industrial and agricultural equipment, Cortez said. The amount doesn't include the investments needed to ramp up agricultural production, however.

If such investments occur, Brazil could be able to boost its ethanol exports to 200 billion liters by 2025 from roughly 3.4 billion liters in 2006, the study said. However, the country's planted area for sugarcane - currently at 5.4 million hectares for sugar and ethanol output - will need to expand to a hefty 30 million hectares.

These studies don't account for the possibility of converting excess sugarcane mass, or bagasse, into ethanol via new cellulosic technologies - a technological breakthrough expected in coming years that may allow Brazil's planted area to grow at a less-rapid rate, said Cortez.

However, Brazil currently has some 200 million hectares of degraded pastures, where agricultural crops can be planted without knocking down a single Amazon tree.

The majority of the BRL20 billion in investments would have to come from private companies and investors, with the rest coming from Brazil's state-owned development bank, BNDES. Brazil is the world's No. 1 sugar producer and exporter. It is also the world's No. 2 ethanol producer after the U.S., but No. 1 ethanol exporter.

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

WHAT JUAN VALDEZ HAS TO TEACH BRAZILIANS ABOUT ETHANOL BIOFUEL

Until the late 1950s, Brazil was arguably best-known for its coffee. The country had just won its first World Cup in 1958, in Sweden, so Brazil didn’t really figure on the global radar screen as a soccer powerhouse (the country has since gone on to win four more editions of FIFA’s world cup).

Carmen Miranda had made several appearances in Hollywood movies in the 1940s and 50s, with her tutti-frutti hat and faux-samba demeanor contributing, perhaps fatally, to building a Banana Republic image that Brazil still hasn’t shaken off entirely.

So coffee and the awe-inspiring natural beauty of Rio de Janeiro were basically all that existed, regarding Brazil, in the global consciousness.

Then, in 1959, legendary advertising agency Doyle Dane Bernbach came along and changed that. Hired by the National Federation of Coffee Growers of Colombia, they concocted a fictional personage called “Juan Valdez”, who, along with his little mule Conchita, came to symbolize quality coffee in the minds of Americans and Europeans alike.

With Colombian coffee at the top of everybody’s mind, selling the product became more and more difficult for Brazilian coffee growers, and the industry in Brazil suffered considerably over the coming decades.

Today Brazil is at risk of losing the lead in the biofuels race. A diminishing number of people around the globe recognize Brazil as the only successful biofuels experience in the world.

Ernst & Young, for example, has published a “Renewable Fuels Index”, in which Brazil does not even figure among the top twenty players, lagging behind such alternative energy powerhouses as Portugal, Ireland, and Austria.

Brazil should not give up its position as the largest, most enduring, most successful biofuels experience in the world to companies with a veiled interest in making it appear that the race has just begun.

It hasn’t. It started 32 years ago in a semi-developed tropical country. While big multinationals will always have the incentive to play to their countries of origin, many of them, such as Madison Avenue's PR and advertising agencies, can be used by Brazil to publicize both its past and present experiences.

Just ask Juan Valdez.

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

ETHABLOG INTERVIEWS LEADING BRAZILIAN BIOFUELS CONSULTANT

Marcelo Coelho is one of Brazil’s leading consultants in the sugar and ethanol industry.

Operating out of Ribeirao Preto, Brazil’s main producing region, Mr. Coelho has witnessed, firsthand, the boom in the sector. He has advised many of the delegations and foreign investors that have visited Brazil in recent months. He can be reached by clicking here.

Ethablog: You chose to leave a successful law practice in the city of Sao Paulo and set up shop in Ribeirao Preto, in the interior of the state. What led you to that decision?

Marcelo Coelho: The Ribeirao Preto region is the “agribusiness capital” of Brazil. It has the highest concentration of sugar and ethanol refineries, the largest production cooperatives, such as Cosan and Crystalsev, industrial-equipment manufacturers, which produce mills, cauldrons, and other heavy pieces of equipment. The Ribeirao Preto area is also home to several important services firms and universities that carry a lot of weight in the sector, such as ESALQ (Escola Superior de Agricultura Luis de Queiroz). And, finally, the biggest fairs in the sugar and ethanol industry in Brazil are held here, such as “Fenasucro” and “Agrishow”. This all makes establishing an extensive network and conducting business significantly more profitable.

Ethablog: What are the main differences between the sugar and ethanol business in Brazil today and that of ten years ago?

MC: I would say that scale and applied technology are the main differences. Planted area has more than doubled, due to internal demand, which surged because of Brazil’s adoption of flex-fuel cars. With growing foreign interest in adding ethanol to the energy matrix of other countries, sugarcane planted area grew exponentially. As to technology, we have adopted new varieties of sugarcane, developed by local universities. Sugarcane, as you often point out on Ethablog, yields a lot more energy than corn, and the new varieties are even more productive. They newest ones have been specially tailored to specific kinds of soil. Another fundamental difference is that the planting and harvesting processes have become much more mechanized, while plant and farm managers have developed better managerial skills.

Ethablog: What does the foreign investor coming to Brazil typically look like? What is he looking for? Greenfields, equipment, smaller companies, inventory?

MC: That is a very good question. Americans generally want to acquire units that are already operational, here in Brazil. They then seek to expand in a continuous and sustainable manner, in order to ship ethanol to the U.S.

Countries like China and India are intent on acquiring technology to use in their own countries. We also see Indonesia starting to head that way.

The Germans, on their turn, who are one of the leaders in biofuels technology and have solid public policies geared toward reducing dependence on foreign fossil fuel, have strengthened their ties with Brazil, in order to firm agreements that will address gaps in the energy matrixes of both countries.

Investors from other parts of the world are mostly interested in studying how Brazil transformed ethanol into a viable fuel, and how we have been using it in a commercially-feasible manner for over thirty years.

It is important to point out that the most conscientious investors come from Europe, who attach a lot more importance to the climate crisis and to the unstable nature of oil-producing regions.

Ethablog: Do you see any strong correlation between the price of oil and the price of ethanol?

MC: In Brazil, the price of ethanol is still adjusted by supply and demand, both for the domestic and the foreign market. Factors that might shift the supply and demand curves one way or the other include domestic income, Brazil’s population growth, the use of substitutes, the exchange rate, foreign income, weather conditions, and production costs.

Ethablog: Are there any assets on the local market that are often overlooked by foreign investors, but that could be of interest?

MC: We find investors to be willing to acquire only production units that are completely balanced, both tax-wise and financially. However, those that have significant tax and financial liabilities are often overlooked. I believe these companies represent the greatest opportunities for investment. Debts are negotiable – in many cases, they can be significantly reduced. Because of these debts, the amount to be paid is a fraction of what is normally charged on the market, and the terms surrounding the deal are much more attractive. After the liabilities are taken care of, and through the adoption of professional management, mindful of market conditions, the units pay off very quickly.

There is also the opportunity to acquire vast amounts of straw and bagasse (crushed sugarcane). These sugarcane byproducts allow for the production of synthetic fuels. Using gasification, we can produce carbon monoxide and hydrogen. It is important to point out that any biomass that contains carbon can be used for this process.

In Brazil, these byproducts are piled outside a plant, or sold at low prices to be burned, or used to cover the soil. All in all, a worthwhile investment.

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

TRACING ETHANOL-POWERED ENGINES IN BRAZIL TO THE 1950’S

Go to original

The greatest experiment in the world in the commercial exploration of biomass as a source of energy has taken place in Brazil. The Brazilian National Alcohol Program (ProAlcool – previous post), which has promoted the use of ethanol fuel made from sugarcane, is at the center of this experiment.

Brazilian experience has shown that it is possible to implement a large-scale alternative energy policy in a very short period of time. Ten years after the program’s inception in 1975, sales of ethanol-powered vehicles reached their peak. At the height of the program, between 1986 and 1989, over 90% of the automobiles produced by GM, Ford, Volkswagen, and FIAT in Brazil were powered by ethanol.

ITA (Instituto Tecnologico da Aeronautica, the Brazilian Air Force Technological Institute), was a pioneer center in the development of ethanol engines. Colonel Urbano Ernesto Stumpf, an engineer and professor, was at the forefront of the effort to develop the engine, a feat accomplished in 1953. The first steps towards industrialization were taken by Prof. Stumpf, who began his tests with the car fleet belonging to TELESP (Telecomunicacoes de Sao Paulo), the government-owned telecom carrier of the state of Sao Paulo. In the 1970s, the ethanol engine was introduced to the entire country.

Continued research on alternative engines and fuels led the Engine Division of the Institute for Research and Development (IPD) of the Brazilian Technical Air and Space Center (CTA) to also develop the first bus engine powered by natural gas.

Prof. Ernesto Stumpf was born in Rio Grande do Sul, Brazil’s southernmost state. He is considered the father of Brazilian ethanol, as he was head of the Engine Research Lab of the CTA, in the city of Sao Jose dos Campos, in the state of Sao Paulo. He began his career as a sergeant at the Specialists’ School of the Brazilian Air Force, in the field of Engine Mechanics. After several years of study, he became an Aeronautical Engineer at ITA, where he lectured for twenty years.

His interest in ethanol dates back to 1951, when he earned his degree. At the time, a project was required for graduation, and he worked on an ethanol-powered engine toward that end.

His company, called PENTRA, was charged in 1974 with developing ethanol engines, which met with immediate success. His pioneering attitude in a wide range of fields, from the introduction of ethanol as automotive fuel to the production of the first engine powered by vegetable oil, won him several awards.

Prof. Stumpf received a posthumous tribute in 2004, when Law # 10,968 was passed, changing the name of the airport of the city of Sao Jose dos Campos to “Sao Jose dos Campos Prof. Urbano Ernest Stumpf Airport”.

In the 1980s, several patents for an ethanol-powered vehicle were registered by the CTA, with Prof. Stumpf as the inventor. Patent PI 8106855 shows a carburetor specifically designed for ethanol. The invention describes a carburetor with a variable-area Venturi, designed to run on combustible ethanol. Traditional carburetors for gasoline-powered engines, when adapted for use with ethanol, presented deficiencies in the pulverization of ethanol and uneven distribution of the air-ethanol mix, in addition to problems involving the corrosion of the materials used.

Because traditional carburetors are made of zinc and tin, ethanol becomes a perfect electrolyte, because it contains water and conducts electricity. Attempts to line the inner surfaces with anti-corrosives or plastics did not work. Variable Venturi carburetors, in which the Venturi simultaneously executes power modulation, had been rarely used up to then because of problems with sealing. The invention proposed by Prof. Stumpf in this patent consists in the substitution of the metal body of conventional carburetors for a body made of plastic, with no canals or screws. A piston (12), which moves inside a cylinder (13) balances out the axial forces, due to differences in pressure, which acts on the fuse (9). This difference is balanced through a tubular stem (10). The pulverization orifices are found in a ring canal in the periphery of the strangled section of the Venturi.

(to be continued)

Sources:

http://www.uol.com.br/bestcars/ct-combu.htm
http://www.uol.com.br/bestcars/ct/alcool.htm
http://geocities.yahoo.com.br/prcoliveira2000/motoresaexplosao.html
http://elogica.br.inter.net/ladislau/fontes.htm
http://elogica.br.inter.net/ladislau/biomassa.htm
http://www.ecomm.com.br/carosamigos/outras_edicoes/grandes_entrev/bautista.asp
http://www.mast.br/videos/tecnologia.htm
http://www.sbpe.org.br/v1n1/v1n1a2.htm
http://www.rits.org.br/pbsd
http://luciano.stanford.edu/~franca/ita/pub/ita.html
http://www.aondevamos.eng.br/boletins/edicao07.htm
http://www.udop.com.br/tecnologia/materias/tec_10_09_01.htm
http://www.udop.com.br/tecnologia/materias/tec_16_08_01.htm
https://www.planalto.gov.br/ccivil_03/_Ato2004-2006/2004/Lei/L10.968.htm

Cronologia do Desenvolvimento Científico e Tecnológico Brasileiro, 1950-2000 (“Chronology of Brazilian Scientific and Technological Development”), MDIC, Brasília, 2002, pages 83, 91, 93, 95
Crônicas de Sucesso, Ciência e Tecnologia no Brasil (“Tales of Success, Science, and Technolgy in Brazil”), Ed. Ciência Hoje, page 31

Special thanks to the inventor’s son, Ricardo Dantas Stumpf (stumpf@solar.com.br), who, in December 2004, contributed to this report.

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