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MECAS(09)06 - Outlook on Brazil’s competitiveness in sugar and ethanol

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This paper reviews the Brazilian sugar cane production and processing sector as well as the drivers impacting the country’s competitiveness in the world market for sugar and ethanol. The paper concludes that Brazil will retain and consolidate its cost-competitiveness in the world market of sugar and ethanol following a favourable combination of agricultural and industry efficiency indicators and world market conditions. First, large scale sugar and ethanol production, with relative returns determining a variable sugar/ethanol split, is a fundamental comparative advantage of Brazil’s cane industry. The vast majority of cane is planted and harvested by the mills themselves, rather than by independent growers, in a model that reinforces gains from economies of scale. In the Centre-South region, one third of all cane processing takes place in mills crushing more than 3 mln tonnes a year each. Moreover, gross income per hectare in sugarcane growing is the second highest among a selected group of crops directly competing for land in Centre-South Brazil, at an estimated USD 1,600 per hectare.

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In addition to gains on the agricultural side, there has been significant improvement in productivity gains in industrial processing as a result of technology advances and synergies in ethanol/sugar/cogeneration production. For the future, substantive productivity gains are expected when bagasse is used for ethanol manufacturing as well as trash for ethanol production and electricity co-generation. In spite of the credit crunch, a strong level of inflow of foreign direct investment in the Brazilian sugarcane industry, resulting in access to cheaper credit, combined with a fastly consolidating industry via mergers and acquisitions, is likely to continue to give Brazil an additional edge over other market players in the short to medium term. Over 20 foreign groups participate in cane crushing in Brazil today, up from none a decade ago. Ethanol and sugar production costs are among the world’s lowest, estimated at a respective USD 0.35/litre and US 12 cents/lb. Furthermore, several projects on the expansion of the country’s transport infrastructure and logistics bode well for the long-term costcompetitiveness of the industry, although over the short term costs may increase due to the
lumpy nature of the investments. On the global sugar market front, Brazil has been benefiting from a relatively long-term trend of high white sugar premiums combined with lower freight rates for bulk sugar. On currency movements, Brazil has enjoyed a long period of exchange rate competitiveness relative to other major exporters. Finally, Brazil may double its fuel ethanol exports to 2015, due to a fast-increasing global ethanol trade, to reach around 10 bln litres. This will be the world’s largest estimated export availability of fuel ethanol and equivalent to 17 mln tonnes of sugar.

 

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