Brazil enjoys sugar power’s sweet success

At the headquarters of Dedini in Piracicaba, São Paulo state, José Francisco Davos, director for business development, has found 40 minutes to talk between visits from two foreign delegations, one from the US, the other from Sudan. The visitors are customers and potential clients, come to see the technology that has made Dedini the leading supplier of equipment for sugar and alcohol mills in Brazil.

Brazil’s ethanol surge is only just beginning. Optimists speak of the country as a green Saudi Arabia, whose combination of land, climate and technology could make it the world’s biggest producer of efficient bioethanol.

The country will produce about 4.6bn gallons of ethanol from the current harvest, using about half of the 16m hectares of land planted with sugar cane. The US produces 4.9bn gallons from some 78m hectares of maize but, while land in the US is scarce, Brazil has enormous scope for expansion.

Of its 790m hectares of arable land, 440m are used for grazing, 150m are used for crops such as soya and 200m are unused, according to Marcos Jank, a specialist in farm trade appointed this month to head Unica, the sugar and alcohol industry association.

Drive 300 km deeper into São Paulo state from Piracicaba – across gently undulating countryside often covered from horizon to horizon by a green sea of sugar cane – and you reach Catanduva, where Usina Cerradinho, a family-owned sugar and alcohol mill, is working at full capacity. This year the harvest began in the first week of April, earlier than usual because the mill will need to run flat out until October to fulfil its contracts.

Last year the company, now in its second generation, opened its second mill about 100 km up the road. “That was before all this agitation over ethanol,” says José Fernandes Rio, managing director. Now it is preparing to spend $180m on a third mill over the state border in Goiás with funding from BNDES, the Brazilian government’s development bank.

New investors, such as Singapore’s Noble Group and US private equity group Infinity Capital, are arriving in a steady stream. Quoted Brazilian companies such as Cofan have attracted foreign equity investors, mostly from the US. If Unica’s estimates are correct, investors will build one new sugar and alcohol mill in Brazil every month for the next six years; projects already under way, it says, will absorb nearly $15bn.

Dedini, the mill producer, is operating at 75 per cent of its capacity and has 18 projects on its books. Sales have grown steadily at 20-30 per cent a year for the past five years and will reach R$1.8bn this year. While export markets are opening up, 80 per cent of sales are in Brazil.

In the past, foreigners have burnt their fingers in Brazil’s farm sector by buying out local farmers and then discovering too late that local knowledge and experience are essential to success.

Many of the latest arrivals seem better prepared. UK-based Clean Energy Brazil, for example, has taken care to involve experienced ­Brazilian producers alongside international investors and commodities service ­providers.

Questions remain as to whether the investment is warranted. Brazil’s home market promises steady demand as locally developed “flex fuel” technology means more than 90 per cent of new cars run on ethanol, gasoline, or a mixture of the two.

But many changes must take place in developed markets before the green Saudi Arabia vision can become reality. “A lot of investors are heading for a nasty surprise,” says one São Paulo consultant active in the area.

There is still uncertainty over what biofuel quotas – if any – will be instituted in some significant potential markets, such as Japan.

Furthermore, a US ethanol tariff set at 54 cents a gallon means that Brazil’s biggest potential export market is all but out of reach. Jeb Bush, brother of US President George.W Bush and president of the Inter-American Ethanol Commission, has conceded that the tariff “stymies” development of an ethanol market in the region.

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