Since the launching of flex-fuel vehicles in the national market in 2003, the sugarcane-based energy industry has followed a growth trajectory, previously only seen at the height of the “Proálcool” program during the 1980’s. Until mid-2008, the industry showed an average annual growth of 10.4%. More than 100 new industrial units came on stream during this period, resulting in that ethanol production increased by more than 12 billion liters to meet the demand brought about by flex-fuel vehicles.

The world’s financial crisis in 2008 slowed down investments in new units and the production growth rate dropped considerably to a little more than 3.5% per year. In this same period, vehicle sales remained high, with the flex-fuel fleet reaching the 13 million vehicles mark. Thus, a gap between supply and demand originated, which was aggravated by unprecedented climate-related problems in the two last harvests.

One of the most visible consequences of this scenario was the strong variation in consumer ethanol prices, showing extreme figures, especially in the off-season.

Such high prices resulted in numerous discussions to point to the culprits and look for explanations for sudden ethanol price variations. However, one must divide such questioning in two major topics, separating seasonal problems linked to prices and supply, from those that are structural, related to production growth.

The former, short-term in nature, are being broadly debated and entail less complex solutions, including the adoption of mechanisms by the private sector to increase ethanol inventories, incentives for pre-contracting anhydrous ethanol and more interaction between private agents, and between these and the government, broadening the degree of planning and the predictability of inventories during the off-season.

In turn, the structural challenges related to hydrated ethanol’s competitiveness and mainly to the industry’s growth level, require medium- to long-term initiatives that are much broader and coordinated, involving governments and private initiative, meriting a more in-depth discussion.

Notwithstanding the industry’s growth rate reduction, the outlook for Brazilian sugarcane remains positive in the long-term, given that this is the most efficient “apparatus” in the world to harness the only abundant and free of charge energy – solar energy – and convert it to energy for vehicles, energy for people in the form of sugar, electric energy and into an ever broader range of clean and renewable products being developed from this fantastic vegetal plant.

In the case of sugar, Brazil is one of few countries with the potential to expand production and supply a significant share of the world market that is growing mainly in developing countries and is unrivaled in terms of abundant supply and low cost. Currently, Brazil accounts for 25% of production and 50% of world exports.

The international ethanol market, in turn, although it is only just beginning, in comparison with sugar, shows significant growth rates – about 15% per year, with a production of 105 billion liters worldwide in 2010. In this scenario, Brazilian ethanol produced from sugarcane is gaining visibility in the United States, the planet’s main consumer market.

The U.S. biofuel consumer market foresees growing consumption of ethanol, reaching 136 billion liters per year in 2022. Of this total, 15 billion liters will consist of advanced ethanol, a classification already obtained for sugarcane-based fuel produced in Brazil, from the U.S. Environmental Protection Agency (EPA). This agency acknowledged that sugarcane ethanol from Brazil reduces greenhouse gas emissions by up to 91%, compared to gasoline.

In U.S. political circles, expectations are high that by the end of this year the American tariff on imported ethanol will be reduced and possibly even totally eliminated. However, regardless of any change in tariff, Brazilian ethanol will conquer its space in that market, given that it has incorporated into the price system the positive externalities of our product.

Thus, ethanol from sugarcane has a distinct mandate and a distinct price in relation to all other biofuels, because from an environmental standpoint it is more efficient.

Apart from sugar and ethanol, a series of new uses and technologies based on sugarcane are under development. Among others, one may include bio-plastics, bio-hydrocarbons (diesel, aviation bio-kerosene and gasoline produced from sugarcane), renewable products for use in the petrochemical industry and in fine chemistry, among others.

There will certainly be growth in production to meet the needs of all these different sugarcane demand variations, provided the industry remains competitive in relation to all other competitors. The situation requiring a little more reflection is that of ethanol as fuel destined to the domestic market, which nowadays absorbs more than half the sugarcane processed by production units.

Ethanol has lost competitiveness in relation to gasoline, to a large extent due to the 40% increase in production costs in the last five years and maintenance of the gasoline price at the pump – the price has remained practically unchanged since 2005. In this scenario there are no economic incentives for the construction of new production units that usually are more dependent on ethanol due to poorer logistics for bringing sugar to market from regions in which production expansion is taking place.

To make ethanol in comparison to gasoline feasible in the domestic market, in the short-term, is the main inducer for starting a new production growth cycle. In this sense, what is needed are clear and permanent rules relative to the value of gasoline, in parallel with the quest for higher efficiency throughout the ethanol production chain, through the reduction in costs in the agricultural and industrial phases.

Investments in logistics, improvement in the efficiency of flex-fuel engines and setting up a tax structure that acknowledges the product’s benefits and positive externalities, in combination with environmental and public health aspects, are also essential measures for resuming expansion.

One should emphasize the challenge of producing more sugarcane to competitively and sustainably meet internal and external demands of the traditional products, ethanol and sugar, and for all others that already exist or may exist in the very near future, which depends on investment decisions that need to be made now.

Thus, it is essential that guidelines with clear objectives with respect to the share of ethanol in the country`s fuel matrix be set as quickly as possible and in a balanced way. In a free market economy, planning and public policies aligned with the defined objectives are essential to attract and direct investments.

Brazil offers exceptional conditions to continue ahead in clean and renewable fuels, but maintaining such leadership does not depend exclusively on the private sector. It also mainly depends on aligning efforts involving government initiatives that prioritize essential actions to assure that measures will have future impact and on a fundamental definition: after all, what does the country expect of the Brazilian sugarcane-based energy industry?