Biofuels in Brazil and the Rest of the World

There is no doubt that Brazil jumped in first place in the biofuels race, thanks to the Ethanol Brazilian Program in the seventies and eighties (as a reaction to the oil crises of 1973 and 1979), and thanks of course to some dynamic entrepreneurs who decided to bet on the production of ethanol since then, and more recently of biodiesel. One legend (or true story?) is that biodiesel was invented in the seventies by a Brazilian, Prof. Expedito Parente of Ceara Federal University, but did not succeed then because the price of oil went up “only” up to 30 dollars in 1979. Some major ethanol producing companies are in Brazil – Cosan is the more famous example – and there are also some huge biodiesel companies such as Brasil Ecodiesel.

Our purpose here is very simple: to make a few comparisons between Brazil and the rest of the world, as far as biofuels are concerned. Really, Brazil seems to be blessed by God and Nature, as far as agro energetic raw materials are concerned, particularly of course sugar cane. But it is always useful to remember that other countries are also blessed, such as Malaysia and Indonesia. Even the United States are of course important players mainly because of soybeans and corn, but it is well-known by now that the major dilemma between food and fuels has to do exactly with the (heavily subsidized) attempt to use corn to produce ethanol – a clear economic policy mistake, which is additionally being protected by a crazy tariff, totally incompatible with the economics of fuels and biofuels nowadays, with oil at US$ 120 per barrel.

Sugar cane is really a “magic plantation” – and Brazil is much better situated in the production of ethanol from sugar cane than any other country. It is true that, even in the USA, sugarcane is produced in States such as Florida, Louisiana, Texas and Hawaii, but there are obvious geographical area limitations, even if the country decides to provide incentives for sugar producers to revert more quickly to ethanol in those four States. Furthermore, Central America and Caribbean countries are also sugarcane producers, including of course Cuba.

Although there is an intense program of research in Universities and companies in the USA in order to develop ethanol from cellulose at a reasonable cost, it is clear by now that it is impossible to compare the cost of ethanol produced from sugarcane with ethanol produced from corn and other raw agricultural materials.

Brazil has a major comparative advantage in the production of ethanol, and, even without reaching the forbidden areas of the Amazon, the amount of available agricultural arable land to increase production is enormous. It is difficult to understand the maintenance of the US tariff on ethanol imported from Brazil, except for political reasons. Consumers in the United States are being severely affected, particularly in areas such as the Southeast, where corn does not exist and the logistics to bring it from the center of the country is practically impossible.

With respect to biodiesel, there is no special comparative advantage in Brazil. Countries like United States can compete equally with soybean oil and Malaysia and Indonesia dominate the market for palm oil, with an impressive productivity, in addition to canola oil, which is prevalent in Canada and Europe. Naturally, there is a permanent search for non-food oils as raw materials for biodiesel such as castor oil and jatropha oil, which exist in Brazil, India and Africa, but in small scales.

With the existing price of oil, the permanent threat of war in the Middle East, the international geopolitics, and the environmental problems, there seems to be no other easy solution for the energy problem away from the liquid ethanol produced out of sugarcane. This is certainly the more important aspect of the Brazilian economy in our opinion for the next few years. The rest of the world will have to accept the reality of the liquid ethanol from sugarcane as the right and best solution for the oil crisis.

It is not necessary to believe in the peak oil theory (developed by chemical engineers, rather than economists); it is only necessary to look at the increasing demand from the non-oil BRICs (India and China) to understand that the very high price of oil is here to stay. With or without compulsory mixtures in gasoline and diesel, ethanol in particular and also biodiesel will be demanded in great scale. The United States will have to adopt the so-called E10 and E85 mixtures.

And the impressive thing about ethanol from sugarcane is that – in contrast to biodiesel derived from soybean oil – there is no cost pressure and no competition with food.

Moreover, even the dilemma between food and fuels may be considered somewhat fallacious, to the extent that the agricultural sector will respond to higher prices of corn, soybeans, palm, etc., by increasing supply. There will be enough soybeans for biodiesel and food – but in the case of corn it will never be able to compete with sugarcane for ethanol. And there will be in the future non-food vegetable oils for biodiesel such as castor oil and jatropha oil.

That is why the sugarcane economic situation does not even have to wait for this market adjustment between supply and demand of agricultural products for food and energy. Ethanol is already very cheap, when produced from sugar cane – much cheaper than gasoline at existing prices. Brazil is blessed, just like it happened last century with many countries in the Middle East, as well as Venezuela and Mexico, in the case of oil.

The major point we are trying to make for these agro energetic comparisons between Brazil and other countries, however, is somewhat similar to discussions from the past related to Brazilian agriculture in general. OK, yes, Brazil is blessed by Nature and God and it is highly competitive with sugarcane ethanol, but the country should not give chances to competitors. Remember the old “coffee country”: Brazilian ethanol will only become competitive and cheap with the right exchange rate. The world of floating exchange rates sometimes creates bubbles: there is no “natural rate” freely defined by the markets. This is the risk faced by a country blessed with sugarcane in practically all States.

From 1955 to 1985, Brazil had an amazing industrial growth and the exchange rate was fundamental for the process of import substitution (fifties) and export expansion (sixties and seventies). In the XXI Century, one should hope that the floating exchange rate does not destroy the new Brazilian agro energy growth perspectives.

We can be sure that the United States, Canada, Malaysia, Indonesia and African countries will also produce ethanol, biodiesel and even biokerozene. Normally, Brazil will be like Saudi Arabia is for oil – as far as ethanol is concerned -, but one cannot be sure when and if the Brazilian exchange rate will come back to normality in the near future.

6 Responses to "Biofuels in Brazil and the Rest of the World"

  1. Francisco Almeida   June 12, 2008 at 2:29 pm

    Grande artigo, Lemgruber, grande artigo ! Parabéns !Sim, esta é a nossa vez – aderindo ao seu singelo e discreto ufanismo.Abraços.

  2. Vitoria Saddi   June 12, 2008 at 2:45 pm

    Professor,I agree it is a great piece. My question to you is if you think that Brazil will be able to export ethanol such that it can become like the Saudis?

  3. Marcos Gomes de Melo   June 13, 2008 at 5:33 am

    Prezado Prof. Lemgruber,Como evitar a doença holandesa? Impondo imposto nas exportações de commodities que estão com preços elevados? Como controlar a inflação advinda dos preços externos de commodities "tradables’? Como controlar a inflação sem aumentar os juros? Como reduzir anular a apreciação do Real mesmo elevando os juros?Concordo integralmente com seu artigo. Pena que a continuar a apreciação do Real e a manutenção da política protecionista dos Estados Unidos e Europa, talvez a crise na nossa industria de etanol chegue antes da sua infância.

  4. Lemgruber   June 13, 2008 at 12:19 pm

    I prefer to give a general answer to some of the comments made: Brazil will become a major exporter of ethanol to the USA.Availability of E85 and E10, with imported ethanol, will create demand all over the USA. Brazil is already the number one exporter of ethanol. In 2008, the estimated number is 1.2 billion gallons, mainly to the United States and some Caribbean countries. Production in Brazil is projected to reach 6 billion gallons in 2009 (more than 1/3 of world production). Cost of production is extremely low, due to sugar cane low costs, and a long learning period of at least 30 years.USA is the largest market in the world for gasoline – 150 billion gallons per year. One can estimate a demand for the USA in 2010 of at least 18 billion gallons for ethanol, either because of the compulsory blending of 10% (E10) in many States, or because of the increasing free market of FFV (GM, Ford, Chrysler and Japanese producers), which will create the demand for E85. Brazil is nowadays at the center of a global movement of gradual substitution of fossil fuels by bio fuels, as well as generation of energy through biomass. Thanks to a sum of factors and reasons such as the technology developed decades ago through the Proalcool, the availability and quality of arable lands, biodiversity, climate, as well as the existence of companies and entrepreneurs fully able in the agro- industrial business activity. Brazil will be able to produce very rapidly 60 billion gallons of ethanol,exporting at least 25% of that.

  5. lemgruber   June 14, 2008 at 6:59 am

    a small correction in my comment above:in a few years, Brazil will be producing 60 billion gallons of ethanol and exporting 50% of that, not 25%. This corresponds to 30 billion gallons of ethanol, more than the expected demand for the USA (18 billion gallons) of which certainly at least 50% will be imported due to the price advantages of sugarcane ethanol. Either Obama or McCain will certainly eliminate the tariff on ethanol imports because it does not make economic sense and Brazil will benefit dramatically.

  6. Jaime   June 16, 2008 at 4:24 am

    Dear Prof Lemgruber, I think your article is really interesting but there’s one thing I’d like to know about a bit and it’s the side effects of this biofuel rising. Deforestation and growing real estate are already threatening important natural areas and how will the current Government control corruption from such a profitable product?Also, how will the discovery of the new oilfields along the coast affect the production of ethanol or the disclosure of Petrobras not to produce more ethanol from food-related sources? Isn’t a shift to oil production just too tempting?Thanks