Brazil's Ethanol Industry

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Brazil's Ethanol Industry A Report from the Economic Research Service United States Department www.ers.usda.gov of Agriculture Brazil’s Ethanol Industry: BIO-02 Looking Forward June 2011 Constanza Valdes, [email protected] Abstract Brazil is a major supplier of ethanol to the world market, the result of its natural advan- tage in producing sugarcane, productivity increases, and policies stimulating the supply of feedstock and of sugar-based ethanol. Global demand for ethanol and other biobased fuels is expected to grow in response to mandates for increased use of renewable fuels around the world. Brazil will be well positioned to fi ll the growing world demand for Contents ethanol. However, Brazil’s ability to supply the export market depends on its domestic ethanol use mandate, world sugar and oil prices, the currency exchange rate, and the Introduction ........................ 2 infrastructure to move ethanol to ports. Brazil is challenged with sustaining production growth in the ethanol sector so as to meet increasing domestic demand and, at the same Ethanol Feedstock, time, maintain its position as a major supplier of ethanol to world markets that are Industrial Processing, and Distribution ...............4 growing rapidly in response to their own ambitious targets for renewable energy use. The Contribution of Keywords: Brazil, ethanol supply chain, sugarcane, sugar, agricultural policies, Policies to the subsidized credit allocations, challenges for the ethanol industry, future perspectives, Development of Brazil’s domestic and global ethanol demand Ethanol Sector ............... 21 Challenges for the Acknowledgments Brazilian Ethanol The author thanks all reviewers for comments, feedback, and suggestions, including Industry .......................... 26 Mary Anne Normile, Molly Garber, Rip Landes, William Coyle, Erik Dohlman, Kim Future Perspectives for Hjort, and Fred Gale of USDA, Economic Research Service (ERS); Alan Hrapsky, Brazil’s Ethanol Michelle DaPra Wittenberger, and Sergio D.S. Barros of USDA, Foreign Agricultural Industry .......................... 30 Service (FAS); David Stallings of USDA, World Agricultural Outlook Board, Offi ce of the Chief Economist (OCE); and Hosein Shapouri of USDA, Offi ce of Energy Policy Conclusions ...................... 36 and New Uses, OCE. Special thanks to Joel Velasco and Luciano Rodriguez from the Brazilian Sugarcane Industry Association for a thorough review and helpful comments, References ........................ 38 which signifi cantly improved the study. Thanks also to Chris Dicken of ERS for geographic information system analysis and cartographic output, Heloisa Burnquist Appendix .......................... 44 of the Center for Advanced Studies on Applied Economics for expert comments and sharing of data, and Douglas Newman of U.S. International Trade Commission for sharing ethanol trade data and expert review comments. The author appreciates and Approved by USDA’s acknowledges the editorial and design assistance of John Weber and Curtia Taylor of World Agricultural ERS. Some information in this report was obtained through activities funded by the Outlook Board Emerging Markets Program of FAS. Introduction Ethanol—a fuel produced from agricultural and other organic materials (biomass)—is considered to be one of the best alternatives to petroleum for transportation fuel, as increased ethanol use reduces the levels of carbon monoxide and carbon dioxide (CO2) emissions relative to fossil fuel use. Tropical sugarcane is also cited as the most effi cient ethanol feedstock in terms of greenhouse gas (GHG) emissions avoided per hectare cropped per year (1 hectare = 2.47 acres). A recent study found that the use of sugarcane ethanol in Brazil resulted in a reduction of 600 million tons in CO2 emissions since 1975, an amount equivalent to about 7 percent of Brazil’s total CO2 emissions from the consumption of energy over the same period (UNICA, 2010a; EIA 2010a). Moreover, the Environmental Protection Agency (EPA) deems sugarcane ethanol an advanced biofuel that reduces GHG emis- sions by 61 percent, compared with gasoline GHG emissions (EPA, 2010). The ethanol energy yield ratio, which relates the energy output of ethanol to the fossil energy input used in its production, is often cited as evidence of the benefi ts of ethanol derived from biomass. The energy yield ratio of sugarcane-based ethanol is 4 to 6 times greater than the energy yield ratio of corn-based ethanol (von Blottnitz and Curran, 2006; Macedo and Seabra, 2008; Shapouri et al., 2010). Because of these outcomes, many countries have implemented energy policies that call for increased ethanol use in their transportation sectors. Ethanol is used in blends with gasoline and in dedicated 100-percent ethanol- fueled vehicles. Ethanol is produced from feedstock containing natural sugars or starch that can be readily converted to sugar. Feedstock used to produce ethanol includes sugarcane, corn, sugar beets, and wheat. Recent techno- logical advances have identifi ed other renewable energy products, including cellulose ethanol, which is derived from cellulosic feedstock crops such as switchgrass, mixed-species grass, restored prairie, miscanthus, poplar, sugar- cane bagasse, straw, and other plant wastes (James et al., 2009). Ethanol produced in Brazil is derived from sugarcane. Brazil’s ethanol production in 2010 (31 billion liters) (1 liter = 0.26 gallons) was equivalent to 38 percent of worldwide ethanol production, second only to the United States (49 billion liters), the world’s leading producer since 2006 (EIA, 2010b). In Brazil, two types of ethanol are produced—anhydrous (pure ethanol) and hydrous. Anhydrous ethanol is typically blended up to 10 percent with gaso- line for use in unmodifi ed engines, to a maximum of 25 percent in Brazil— with modifi cations to the engine calibration system to detect the higher oxygen of ethanol blends (UNICA, 2009). Hydrous ethanol (E100) is used in 100-percent ethanol-fueled vehicles and the newer “fl ex-fuel” vehicles, which are powered by gasoline (E25) and ethanol (E100, hydrous) in any proportion in a single tank of fuel. Ethanol accounts for more than 56 percent of gaso- line use in Brazil (including hydrous plus anhydrous ethanol), compared with 8 percent in the United States. Production and use of sugarcane-based fuel ethanol in Brazil began in 1975 when the Alcohol Program (Proálcool) was launched in response to soaring oil prices and a crisis in the international sugar market. The program resulted in new commercial uses for sugarcane and made Brazil a pioneer in the use 2 Brazil’s Ethanol Industry: Looking Forward / BIO-02 Economic Research Service/USDA of ethanol as a motor vehicle fuel. Brazil’s development in this area was facilitated by the country’s availability of feedstock, a supportive ethanol policy environment, and effi ciency improvements in cane production and ethanol conversion processes. Until 1999, the country’s supply of feed- stock was stimulated by decades of Government support provided through controls over producer prices for sugarcane: the Government set prices along the sugarcane and sugarcane products chain, established production and marketing quotas for both sugar and ethanol, and was the only domestic distributor and exporter of sugar and ethanol (OECD, 2005). To stimulate demand, the Government implemented ethanol legislation that established mandatory blending targets and subsidized continuous advances in the auto- mobile industry for more effi cient use of ethanol. Brazil is now challenged with sustaining production growth in the ethanol sector to meet increasing domestic demand and, at the same time, maintain its position as a major supplier of ethanol to world markets that are growing rapidly in response to their own ambitious targets for renewable energy use. This study examines the historical development of Brazil’s ethanol programs, the factors that gave shape to the current structure of the industry, and the potential challenges over the next decade. 3 Brazil’s Ethanol Industry: Looking Forward / BIO-02 Economic Research Service/USDA Ethanol Feedstock, Industrial Processing, and Distribution The sugarcane sector is a major component of the Brazilian economy. With a value added of around $33 billion annually, the output from the sugarcane and sugarcane products chain makes up about 2.3 percent of Brazil’s Gross Domestic Product (GDP) and 15 percent of value added in Brazilian agricul- ture (IBGE, 2010b). In 2008, the sector generated 4.4 million jobs—1 million directly and 3.4 million indirectly (CAGED, 2009). Sugarcane Production Sugarcane is cultivated in most Brazilian States. The spatial distribu- tion of sugarcane in Brazil is divided into fi ve regions (Southeast, South, Center-West, North, and Northeast) defi ned by State boundaries and similar characteristics regarding climate, topography, soil, natural vegetation, and agricultural land use (fi g. 1). Sugarcane in Brazil is grown under rainfed conditions, and planting occurs year round, but 75 percent of planting takes place in January-June (Southeast, South, and Center-West), and May-October (North-Northeast) (CONAB, 2010). New cane cultivars with different maturation times allow for contin- uous harvesting over 8 months (April-November) across regions in Brazil, which contributes to low costs of production (IDEA, 2006). Sugarcane area has expanded considerably, growing 3.3 percent per year from 1975 to 2010, four times the annual average growth for total area harvested for all fi eld crops in Brazil. Harvested
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