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Plinio Mário Nastari

President of Datagro



The sugar-based energy industry grew significantly in recent decades, with diversification aimed at ethanol. From the period 1975-76 until 2010-11, the industrial sugarcane processing scale increased from 68 to 620 million tons (Mton); the supply of ATR (from Portuguese for Sugar Total Reduced) increased from 7.1 to 86.9 MT; sugar production multiplied 5.5 times, increasing from 5.9 to 38 Mton, while that of ethanol grew 48 times, increasing from half a billion liters to 27.4 billion.

In 1975, Brazil exported 1.2 million tons of sugar, which corresponded to 17% of the sugarcane production. Last year, this percentage doubled to 31%, but the volume increased to 28 Mton, representing 53% of world exports.

Ethanol was the first concrete step towards the diversification of the Brazilian sugarcane industry. With respect to the sugar-ethanol production mix, variations have been relevant. Last year, each 1% variation represented 828,000 tons of sugar, or almost 500 million liters of anhydrous equivalent. This diversification process resulted in an incomparable achievement for Brazil, which is the country’s capacity to arbitrate markets according to relative sugar and ethanol prices.

Growth in sugarcane production can be divided in two phases. It increased from 68 to 321 Mton until 2002, and then, until 2010, increased to 620 Mton. This 2nd development took place following the perception that Brazil was unbeatable in terms of production cost. In 2002, the FOB production cost of bulk crude sugar was 5.5 dollar cents.

The 2nd ranking on the list was at 12.1. Nowadays, the production cost is 21.5 cents per pound of weight, and there are countries that have lower costs. The main reason for this is the foreign exchange rate, in addition to actual cost increases of labor, agricultural operations, losses in mechanical harvesting and costs of inputs.

Brazil’s production will continue to grow, even if the country is no longer the most competitive country, essentially because it maintains the advantage of continuing to arbitrate markets, which is a unique opportunity resulting from diversification.Due to the sharing of growth and the uncertainties related to competitiveness, there has been a reduction in the number of new plant projects.

One must add to this problem all the vicissitudes faced in the current harvest resulting from the effects of the delay in the physiological development of the harvested sugarcane, from the trampling and compacting of soil that occurred at the end of the 2009-10 harvest, the prolonged drought that occurred this year, the precocious flowering, the loss of productivity, the increase in fiber content, and frost. The strategy to diminish the crushing rate, natural under such circumstances, had to be postponed so that the flowering and frost affected sugarcane could be harvested.

Compounding the problems, pest infestations took place, which in some regions exceeded the acceptable levels of up to 1.5%, reaching 15%. The Sphenoforus, previously limited to Piracicaba, disseminated throughout the State of São Paulo. The Migdolus pest, typical of the Pontal do Paranapanema region, started appearing in almost all regions. The orange rust pest affected areas in which susceptible varieties are prevalent.

Significant losses occurred due to mechanical harvesting, given the increase in mechanized  areas, brought about by the lack of trained personnel, increasing the costs of CCT (from Portuguese for cutting, loading and transporting sugarcane). The agricultural performance curve of the current harvest is disappointing. One should also consider the low industrial performance, worsening the ATR supply problem.

Due to all these reasons, costs have remained at higher levels than in previous years, reflecting in the prices of anhydrous and hydrated ethanol, and in the price curve of futures contracts at the BM&F.  However, we must avoid the high seasonality of prices that still exists, which causes discomfort for producers, distributors and consumers.

Nowadays, agriculture is the priority. This industry has an industrial capacity of almost 700 Mton of sugarcane, 620 in the Center-South and 72 in the North and Northeast, with crushing estimated at between 490 and 510, and 67 Mton, respectively. There is a sugarcane gap of between 120 and 140 Mton, which needs to be looked at.

Although the focus now is on agriculture, due to the growing demand for sugar and ethanol in the domestic and foreign markets, within 3 or 4 years, additional crushing capacity will be needed. Now is the time to plan this expansion.

In this scenario, we must recognize the importance of this enormous wealth represented by the flex fuel fleet, which is like a sponge capable of absorbing large volumes of saccharose, provided relative prices allow this. The flex fuel fleet is a saccharose sink, a sugar sink, capable of regulating the market, allowing Brazil to play the role of regulator, given its diversification and because of this fleet.

In 2020, each 10% variation in the proportion of the vehicle composition of the flex fuel fleet running only on ethanol will cause a demand variation of 7 billion liters, the equivalent of 11.3 Mton of sugar, resulting in that sugar will definitively be intimately linked to the energy market – of ethanol, gasoline and oil.

The current risk is that if the supply of sugarcane and the crushing capacity do not increase at the appropriate rate, the use of ethanol may be en route to increasing anhydrization, as was the case in the 1990’s, with the slow scrapping of the ethanol-driven fleet. If this should happen, as a nation, we would forgo the opportunity to promote decentralized development, growth of income and the substitution of imports.

We performed three simulations with ATR demand by segments until 2010, to find out what the projected demand would be until 2020, for different scenarios of ethanol-driven vehicle proportionality in the flex fuel fleet. With 20% of the flex fleet using ethanol by 2020, the demand for sugarcane in Brazil is 960 Mton, so, considering the production in the current year, there would have to be a 400 Mton growth.

We have 8 years to accomplish this. With 50% of the flex fuel fleet using ethanol, the demand would be 1.2 billion tons, while at 80%, it would be 1.43 billion tons. Taking 50% as the reference, uses would break down as follows: 13 Mton of ATR for domestic sugar; 43 for export sugar; 70 for hydrated ethanol; 13 for anhydrous ethanol fuel; 8 for other uses of ethanol and 28 for export ethanol, which, in fact, is a very conservative assumption that considers exports of only 12 billion liters to the USA, which has a legislated demand of 136 billion liters, with a limit of 57 billion liters for ethanol from corn.

So, what is the problem? What determines the percentage of what becomes ethanol or sugar is the gasoline price? Based on the world price, one can see just how wrong the gasoline price set by the government is, which on its end shows no inclination to sacrificing inflation targets. It would be a difficult mission to ask the government to correct the gasoline price.

So, the problem is to foster ethanol consumption, without adversely affecting the inflation target, while at the same time acknowledging that Brazil achieved a unique condition for having an extraordinary fuel, clean, renewable, that brings so many benefits for the country, while not causing a major distortion.

One possibility would be to offer credit to the consumer, for using renewable fuel, consistent with the philosophy of the “invoice incentive program” of the State of São Paulo. Another would be to create a tax on carbon, as a temporary measure, acknowledging the positive externalities of ethanol. We must adopt creative measures that do not hurt Brazil’s participation in the world market, because our competitors are ready to accuse Brazil of creating distorted trade measures.

The government’s image is not good, albeit there are reasons for the contrary. Sugarcane occupies 8.7 million hectares, corn 14.4 and soybeans 21.3. Considering the Value  of Agricultural Production (VPA) of all crops, however, sugarcane is the one generating the most income, at 20.3%, whereas soybeans generate 17.6%, and corn 11.7%. When one considers the value of sugarcane transformed into sugar and ethanol, the VPA increases to 29.4%.

Apart from the income it generates, sugarcane played an essential role in complementing the supply of liquid fuels, representing, since 1975, 2.1 billion barrels of gasoline equivalent. Considering that Brazilian reserves, before the pre-salt layer oil discovery, totaled 13.5 billion barrels, these 2.1, therefore, represent close to 16% of the country’s reserves.

At the world market price the value of this substituted gasoline was US$ 261 billion, representing 75% of Brazil’s international reserves, and was viewed as the country’s salvation anchor against financial turbulence. It is unimaginable that Brazilian authorities should not be sensitive to this information. Setting appropriate policies will allow Brazil to become a leader and a world reference for countries that can use sugarcane as the main raw material for energy generating agriculture. We learned to do this in the last 25 years.