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High operating costs in Brazil are proving this year more than ever before to be a systemic, recurring illness that are affecting national industries across the board. But arguably nowhere is it having a greater impact than in the country's agricultural sectors, with sugarcane the chief victim.
 
Higher production costs and a poor exchange rate with the dollar (until last week) have had their role in the negative turn for Brazilian manufacturing and commodities sales this year. But Brazil's chief problem with competitive manufacturing has always been the mountain of burdensome taxes, labor laws and poor infrastructure that producers here have had to summit on a regular basis while competitors in other markets have moved more freely. 

It's ironic that Brazil is experiencing a mini-crisis in sugar and ethanol at the same time that the stars have seemingly aligned for sales in these markets. Cane-based ethanol was recognized as an advanced biofuel not too long ago by the US and EU. Protectionist tariffs in the US that prop up inefficient maize ethanol seem more likely to be phased out than ever before.

Demand for ethanol from fuel and chemical sectors is rising at breakneck speed within Brazil and in countless export markets. Brazil's cane production, which was just over 600 million tonnes in 2010, should top 800 million by 2015 and must break 1 billion tonnes by 2020 to meet projected demand.

But the negative market forces on Brazilian cane have been well-documented over the past two years. The lending market has been slow to rebound for sugarcane following the global financial crisis of 2008.

It has caused producers to tighten their purse strings in all areas, which has led to the weak harvest this year that was induced, in part, by a lack of investment in refreshing the cane crop. Total recoverable sugars are down this year from an average of 141 kg per tonne to an estimated 132 kg per tonne.

Aside from productivity losses, Brazil's sugar and ethanol industries have suffered most from an extraordinary increase in production costs, and for that they have no one to blame but themselves.

Between 2005 and this year, industry consultant Canaplan estimates that production costs in dollars per tonne of cane have risen 70% in Brazil, more than double the nation's inflation rate of 34% during that period. In the case of sugar, Sao Paulo-based Archer Consulting estimates that the cost in dollars per pound has risen from just over 9 cents six years ago to at least 21 cents today, an increase of 130%.

Simply put, Brazil is no longer the lowest-cost producer of cane-based ethanol and sugar in the world, and the industry hasn't adapted well to the effects of that reality.

The impact of Brazil's poor transportation options (i.e. highways, waterways and railways) has ranked the country among the five most costly in the world for business over the last five years (in its respective category for size and “second-world” status).

Brazil's labor-related taxes and mandated benefits for workers have ranked the country no. 1 in its class for most of the last decade. And if you want to import competitively-priced products to help evolve your local business? Forget about it.

Mill owners who want to expand or refurbish their plants would like to import cheaper parts that are made overseas, but import tariffs push that product's cost above the price of domestic options. The problem is, Brazilian-made mills and their parts are among the most expensive in the world.

Some government-imposed limitations specific to this sector have also played a role in pushing up costs for cane growers and millers. The government's prohibition on land acquisition by foreign companies has prevented many growers from securing the funding necessary from foreign partners to initiate expansion projects.

Brazil's Ministry of Labor has also prevented outsourcing of the mechanization of cane harvesting, arguing the cane cutting is a “core aspect” of the agricultural process, and can't be outsourced by the grower. This is an often overlooked mandate by the government that growers say could save them lots of money if they could simply hire a third-party cane cutter to do the work.

The lasting effects if these restrictive policies continue are cause for real worry. In a best-case scenario, the sector's cane production deficit only lasts until 2015, the earliest point when expansion efforts could probably catch up to demand.

The price of ethanol, especially hydrated “pure” ethanol Brazilians can choose for their flex cars, will continue to rise as a result of the recurring shortage of cane. The inherent benefits of the flex-fuel vehicle will be at risk if this continues, because the use of gasoline and vehicular natural gas in Brazil is steadily rising.

Automakers know their flex engines cost more than a standard gasoline engine, so you could see at least one car brand reintroduce the gas-only car in Brazil that would be promoted with a lower price than flex-fuel options.

And finally, new opportunities in ethanol chemistry and cane-based product development will be at risk, if not outright lost, once rising costs of the raw material make the science too pricey.

Brazilian sugar and ethanol has the potential to run like a greyhound, but with at least a half-dozen government leashes around its neck, the sector can't be expected to win a race anytime soon.