Biofuel is one of the newest and largest trends sweeping the world. Gaining interest in countries and economies, governments have announced strong commitments to biofuel programs in order to reduce greenhouse gas emissions and diversify energy sources. Although these programs are new to many countries, Brazil has years of experience with sugarcane-based ethanol, creating a success story for others to reference. Currently, Brazil is the largest biofuel market with the United States ringing in a close second. However, Brazil’s ethanol is created from sugarcane while the U.S. uses corn to produce their ethanol. Not only is Brazil’s sugarcane-based ethanol the first renewable fuel to be cost-competitive with transportation fuel, but it is also the most economical compared to its competitors. The ethanol’s efficiency is due to the power of the sugarcane compared to corn as an ethanol feedstock, a perfect climate for sugarcane harvesting, and the large, unskilled, inexpensive labor force in Brazil. In addition, the U.S. uses almost double the amount of land to farm corn to produce ethanol as Brazil uses to harvest sugarcane to produce almost the same volume as ethanol.
What is Ethanol?
Ethanol is an alcohol fuel distilled from plant materials, such as corn and sugar. Ethanol is the main biofuel for transportation and Brazil is the greatest exporter globally of bioethanol. The sugar and ethanol industry in Brazil make up 2.3% of the Domestic Gross Product, generating 4.5 million jobs for Brazilian citizens. Not only is ethanol responsible for 50% of fuel volume consumed by cars and light vehicles, but it also represents 90% of gasohol, a blend combined with gasoline, used by many oil companies. Brazil consumes 31% of global ethanol consumption, of which 96% is used for fuel and the other 4% for industrial use.
History of Brazil’s Ethanol Program:
Beginning in the 20th century, Brazil started using ethanol for energy purposes. 1905 gathered government attention as the first tests were conducted to use ethanol as fuel for vehicle engines. Shortly thereafter, a law was inducted in 1931 requiring ethanol to be mixed with gasoline at a rate of 5%. Almost 100 years ago we can look at one of the first blends of gasoline and ethanol that is still in use today! The 1970’s represented a decade of struggle and obstacles for Brazil, only to be triumphed with new technology, programs, and investments. Due to the Arab oil embargo in 1973, oil import costs tripled for Brazil. 1974 provided a drastic change when world sugar prices finally decreased following a 10-year steady rise in price. These two extreme changes in the global market paved the way for a new program to take the lead in ethanol fuel production and reduce their dependency on oil imports. The Brazilian National Alcohol Program (PROALCOOL) was launched in 1975 to create a large-scale ethanol generation for distilleries and engines to adapt and consume pure ethanol or the E20 Blend (20% ethanol and 80% gasoline). PROALCOOL has provided Brazil with an agricultural price support program and an energy security program. The agricultural price support program wanted to give Brazil a guarantee that profits from sugarcane and the sugar industry would not fall as they did in 1974. The energy security program directed their attention to increasing the production of sugarcane alcohol to be used as a substitution for gasoline. The excess production of sugar would be taken to special distilleries close to the sugar mill to be converted into ethanol, which would then be blended with gasoline. PROALCOOL’s first phase was to increase the number of distilleries within the existing sugar mills in Brazil. Their plan was for the federal government to aid them in the construction of new refineries by offering low-interest loans and credit guarantees. The government supported PROALCOOL and in order to keep the cost of ethanol below the cost of gasoline, the government made infrastructure investments for ethanol distribution from the state oil company, PETROBRAS. PETROBRAS was able to successfully distribute ethanol through a cross-subsidy scheme that artificially raised gas prices so ethanol remained at a low, competitive price.
The Past Few Decades:
1979 sparked the second oil crisis requiring Brazil to take immediate action once again. Since PROALCOOL has already been established, it was quick and easy for the government to expand on their current principles and phases of ethanol production. PROALCOOL’s next movement was to promote the production of vehicles designed to run on ethanol. Brazil took off with this idea and by the first half of the 1980’s, 95% of automobile production in Brazil was ethanol-powered cars. However, the second half of the 1980’s was marked with fiscal deficits and inflation that required new economic reforms for Brazil. During this time ethanol production subsidies were decreased causing problems for the ethanol program in Brazil, and oil prices simultaneously decreased significantly driving customers to purchases oil instead of ethanol. 1988 marked another economic downturn for Brazil when the world sugar price rose radically and concurrently the government liberalized the sugar export market. The new sugar export market posed a problem for the ethanol market because sugarcane farmers exported their sugar instead of using it for ethanol, leaving a severe ethanol shortage. With government intervention, Brazil was allowed to import ethanol and actually became a net importer of ethanol during this struggling time period. In the 1990’s Brazilian government started to become more lenient towards PROALCOOL as Brazil’s new economic policies changed and worked against PROALCOOL. Brazil finally entered a time of stabilization, privatization, and liberalization, but this required the repeal of PROALCOOL’s incentives and subsidiaries. With this, alcohol prices were not fixed but fluctuated with the market price. Government intervened once again and made it a requirement that about 20% of all gasoline sold in Brazil needed to contain ethanol to reduce emissions of lead and other pollutants caused by gasoline from vehicles. Moving into the 2000’s the flex-fuel engines were created and designed locally in Brazil. These vehicles stayed in the Brazilian market because their engine could use pure ethanol, any blend of ethanol and gasoline, or pure gasoline. This vehicle is extremely advantageous for the consumer since they can choose the cheapest form of fuel to fill up their vehicle. The production of the flex-fuel engine also facilitated the ethanol market regulation. Currently, eight out of ten cars in Brazil are flex-fuel vehicles and majority of the ethanol produced in Brazil is consumed in Brazil
Comparison to the U.S.:
The U.S. has become a global leader in ethanol production and is trying to adopt many of Brazil’s methods and technologies to pursue their own sustainable energy alternative. In order for the U.S. to compete on the same level, they will have to switch to corn-based ethanol production. For this to be cost-competitive with gasoline, American taxpayers will have to pay twice for ethanol: first in crop subsidies to corn farmers, then second in a 51-cent subsidy for every gallon of ethanol. This is a clear sign that the U.S. cannot model their ethanol strategies based on Brazil’s success. Furthermore, since there is such a large amount of ethanol needed to change the current petroleum consumption, there will be significant environmental consequences. Ethanol may damage the environment when it is produced on a large-scale from low-yielding crops such as corn. Contrary to the U.S.’s relatively new strategy, Brazil’s ethanol infrastructure model required huge taxpayer subsidies over decades before it could become economically feasible. The ethanol program became uneconomical, again, in the late 1990’s when petroleum prices fell and people began purchasing petroleum over ethanol. The Brazilian ethanol program is not a suitable model for the U.S. energy policy reform because of the current global economy and the fact that Brazil began their initiative many years ago. Brazilians still struggle today due to the volatile price of ethanol during periods of high oil prices and government regulation on the E20 Blend mandate. Aside from Brazil’s occasional economic struggle, they experienced a new upset when the U.S. became the world’s largest ethanol producer. Following the major change in the market, U.S. ethanol prices decreased with global oil prices, but Brazil’s ethanol prices remained high and could not compete in the market. In addition to this loss for Brazil, the U.S. continued to have growing capacity and production of ethanol which took away even more of Brazil’s ethanol market share. Brazil’s ethanol exports continued to diminish, and between 2009 and 2010 Brazil decreased 63% of their ethanol exports due to increasing domestic needs. The graph below shows the Global Ethanol Production in the past several years.
Positive Impacts:
The advantages of ethanol use for energy production in Brazil are diverse. The most important and widespread by the media is definitely the reduction of emissions. Environmental officials estimate the use of sugarcane ethanol in Brazil has reduced the country's greenhouse gas emissions by 600 million metric tons of carbon dioxide since 1975. Furthermore, one can also take into account the prospective economic growth that Brazil can have due to this source of energy. Economists estimate that Brazil's total economic output is 35% higher today than it would be had it been without the country's focus on diverse energy production from offshore oil to sugarcane ethanol production.
In addition to Brazil’s environmental improvement, their culture and economy have also been thriving since becoming the largest ethanol exporter. As a result of their effective process of converting sugarcane into ethanol, they became independent on foreign oil imports in 2006, significantly changing the market atmosphere. Furthermore, they have been looked at as a leader and mentor in the environmental and energy world with their implementation of ethanol fueled cars. Not only is ethanol safer for the environment than other fossil fuels, but it is a much more cost-effective solution then expensive competitive fuel and oil.
Ethanol is produced from sugarcane which is matched with growing success from Brazil’s tropical environment. Sugar is the most economical way to make ethanol which also reduces costs and expenses for Brazil’s economy. Brazil is able to save even more money by producing and using cars that can run on pure ethanol. Flexible fuel vehicles have engines that can run on any blend or pure form of fuel, giving customers the most inexpensive form to fill up their gas tank. This dynamic automobile industry as we all as quickly adapting population of consumer help Brazil’s ethanol industry stay stable and thriving even through tough economic times.
Challenges for Brazil’s Ethanol Industry:
Brazil’s ethanol industry faces challenges related to economic, environmental, and social factors that may affect the ethanol supply chain. Economic factors include changes in the world price of commodities necessitated for the production of ethanol, and changes in the world price of oil that will affect ethanol demand. Key challenges also include infrastructure constraints along the ethanol supply chain and apprehensions about expanding land for farming, resulting in deforestation. Social factors relate to the impacts on employment from increasing technology changes that will provide more efficient harvesting and processing techniques, but less human intensive labor. Ethanol is created from crops, such as corn or sugar, which are heavily relied on in other industries like farming and food supplies. Therefore, transferring any amount of product form one industry to another will create a large, catastrophic ripple effect in prices for the consumer, usually noted in the food industry at the grocery store. This effect usually comes full circle and will make a final impact on the profit margin of ethanol in Brazil. The changes in cost of feedstock also directly affects the profit margin for ethanol and even determines the increase and future expansion of ethanol plant capacity Since ethanol is made from crops, ethanol is susceptible to price volatility during changes in seasons and unexpected occurrences in the environment. Therefore, it needs to be prepared to have excess supply of crops during periods of drought and extreme weather to be able to survive in the ethanol industry. Unfortunately, there is no way to plan for unexpected factors such as the weather so the volatility of ethanol increases again. On a political scale, Brazil needs to focus their attention on changing policies with other countries to ensure that ethanol usage is adopted on a large scale to continue making a profit on their investment. Nevertheless, their biggest obstacle will be changing the face of the automotive industry. Brazil needs to change the world’s current vehicle engines from running on petroleum based fossil fuels to ethanol based fuels. This will obviously be a lengthy process which will increase debt for Brazilian government and taxpayers. Trade policies are also an important factor to address in order for Brazil to remain as the largest ethanol exporter. Brazil needs to work with other countries to develop beneficial trade policies for each party involved. The ethanol supply chain already has some bumps in it, but infrastructure and transportation provides new constraints for Brazil. The cost of transporting feedstock is substantial which negatively effects the production and supply of ethanol. Majority of the ethanol is transported from processing plants to PETROBRAS collection center. However, the cost for truck transportation is very high and in addition, the infrastructure of roads is very poor and increases the cost of transportation as new routes have to be used to deliver ethanol. Fixing the poor infrastructure throughout the roads and towns would only place more financial distress on the government and ethanol industry. Due to the poor roads, distilleries are being built in stable locations which are much further from ports. This creates another financial burden because the transportation from distilleries to ports will be even longer. Port costs are also higher in Brazil than in any other country due to the poor port infrastructure. Although ethanol has been known for being ‘green’ and better for the environment than other fuels, the biofuel industry in Brazil has been linked with an increase in air and water pollution. The additional land required for ethanol production has led to a proposal of deforestation in the Amazon and Atlantic rainforests. The destruction of species in these rainforests are opening minds to pivotal questions such as, is it worth it to give up food supply and land for massive farms? Sugarcane production uses herbicides and insecticides which are major contributors to the ground-water and river pollution. Sugarcane actually uses these chemicals more than any other crop, and the major air and water pollution problems are directly related to the production of ethanol in chemical plants. Sugarcane production relies heavily on manual labor, and in Brazil close to 300,000 workers are employed to cut cane alone. However, with technology and the mechanization of harvesting cutters current laborers will be forced out of work. The largest social issue is that Brazil’s ethanol industry is expanding poverty and promoting labor corruption. The inexpensive labor of Brazilians provides the ethanol industry with thousands of low economic workers. These citizens endure some of the hardest labor in the world and will work even longer in these for extra income. It is estimated that 40,000 seasonal migrant laborers participate in the annual harvest where they are paid the weight of what they cut. This provides an incentive for all workers to work exceptionally long and strenuous hours in the heat. However, in 2005, Brazil registered 416 deaths from sugar-based ethanol production.
Conclusion and Lessons: Brazil continues to expand its influence of ethanol by now becoming a supplier of ethanol to the U.S., Europe, and Asian countries. To reach the growing export demand, it is projected that Brazilian sugarcane-based ethanol production will rise 45% by 2020. Although Brazil is assumed to be the best country of its ability to meet export demands, their key factors in being a successful ethanol exporter creates many challenges. Even though Brazil has access to low-cost labor, the ability to increase productivity in sugarcane and ethanol production, initiatives to expand harvesting for sugarcane farmers, currency exchange rate, and large capacity of its infrastructure to move ethanol to ports, they cannot control sugar prices or guarantee sugar reserves for ethanol. Sugarcane farmers obviously want to make the most money from their crop so they determine if their sugarcane is milled for sugar or for ethanol based on the world sugar price versus the price of ethanol in Brazil. For instance, if world sugar prices are high in relation to ethanol prices, ethanol will receive a shortage of supplies, shorting their exports. Brazil’s new projects and developments also indirectly affect ethanol demand and prices. For example, the increasing popularity of Brazil’s flex-fuel cars leads to an increase in demand for ethanol. Increase in demand is good, except Brazil’s domestic ethanol prices depend on domestic demand, which are both increasing in this example, so ethanol prices begin to rise. This rising domestic demand for ethanol pushes ethanol prices to a point that they cannot even compete in the world ethanol market. When Brazil reaches this point, their ethanol is not entering export channels, leaving a gap for another producer’s ethanol to take advantage of. 2009 replicates this scenario when the U.S. takes advantage of Brazil’s implications and takes over the number one spot as world’s largest ethanol exporter. Although the U.S. is in the lead now, U.S. ethanol exporters are concerned about the impact that rising corn prices would have on ethanol prices and the connection between biofuels and food inflation. Likewise in Brazil, Brazilian ethanol exporters are concerned about the continuing of sugar prices and infrastructure bottlenecks. If Brazil continues to have complex supply concerns, the U.S. will continue to be the number one exporter and even more opportunities will present themselves for U.S. ethanol producers. U.S. ethanol production is expected to continue to grow as incentives are being passed to continue the high volume use of ethanol. Brazil is facing a change in demand, as they are becoming a more lucrative domestic market for ethanol. In 2010 Brazil sold more ethanol within the country than the amount exported abroad, and this trend is predicted to stay the same over the course of the next 10 years. USDA projects that a share of Brazil’s ethanol will always be exported abroad, but majority of Brazil’s ethanol production will stay within the domestic market. Brazil will continue to be a powerhouse of ethanol by producing, selling, and exporting at high volumes. Brazil’s land for crops and pasturelands for feedstock will grow in relation with the increasing demand of ethanol. Industry concentration is also expected to increase in the next years, mainly through mergers and acquisitions. These factors encourage Brazilian ethanol producers to continue to meet demand and remain as a leader and dominant player in the global ethanol market for years to come.
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