Nov 17, 2014

Brazil's Largest Ethanol Producer Reduces Investments in the Sector

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

These are troubled times for the sugar/ethanol sector in Brazil. Continued adverse weather and poor economics has led to numerous sugar mills closing down and now Brazil's largest ethanol producer has announced a sever reduction in their investments in the sector.

The company, Odebrecht Agroindustrial, has announced that they are cutting in half their annual investments in their ethanol/sugar/electrical operations. Their annual investments of R$ 1 billion reals is being reduced to R$ 500 million. This reduced level of investments is being directed at renovating existing sugarcane fields in an effort to improve productivity. Investments in any new operations have been suspended.

According to the vice president for institutional relations Amaury Pekelman, they started investing heavily in the sector when Luiz Inacio Lula da Silva (Lula) was president of Brazil because of his commitment to a strong and growing sugar/ethanol sector. Unfortunately, hopes for the sector have now dimmed considerably and the company no longer feels the previous level of investments are justified.

The company will continue processing about 25 million tons of sugarcane annually, which is far short of their 40 million ton capacity. The company dedicates 85% of its processing toward the production of ethanol and the company is capable of producing 3 billion liters of ethanol per year, making them Brazil's largest.

Brazilian ethanol is in an uncompetitive position compared to gasoline due to the government's preference for holding down the price of gasoline as a way to combat domestic inflation. Ethanol prices are directly related to the price of gasoline, so when gasoline prices are low, ethanol prices are low as well.

In an effort to help the sector, the government has authorized an increase in the percentage of ethanol blended into gasoline from the current 25% to 27.5% early next year. President Rousseff signed the legislation several months ago authorizing the increase, but only if it did not present technical problems for the Brazilian automobile fleet. Initial test conducted with the higher blend indicated that there were no significant problems associated with the 27.5% blend. Most of the cars on Brazil's highways have flex-fuel engines so they can support a higher mixture of ethanol