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.

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.