Brazil Ethanol Industry - Constanza Valdes - BIO02 - 2011

A Report from the Economic Research Service
United States Department of Agriculture
www.ers.usda.gov
BIO-02 June 2011
Brazils Ethanol Industry: Looking Forward

Constanza Valdes, cvaldes@ers.usda.gov Abstract
Brazil is a major supplier of ethanol to the world market, the result of its natural advantage in producing sugarcane, productivity increases, and policies stimulating the supply of feedstock and of sugar-based ethanol. Global demand for ethanol and other biobased fuels is expected to grow in response to mandates for increased use of renewable fuels around the world. Brazil will be well positioned to ll the growing world demand for ethanol. However, Brazils ability to supply the export market depends on its domestic ethanol use mandate, world sugar and oil prices, the currency exchange rate, and the infrastructure to move ethanol to ports. Brazil is challenged with sustaining production growth in the ethanol sector so as to meet increasing domestic demand and, at the same time, maintain its position as a major supplier of ethanol to world markets that are growing rapidly in response to their own ambitious targets for renewable energy use. Keywords: Brazil, ethanol supply chain, sugarcane, sugar, agricultural policies, subsidized credit allocations, challenges for the ethanol industry, future perspectives, domestic and global ethanol demand
Contents
Introduction ........................ 2 Ethanol Feedstock, Industrial Processing, and Distribution ............... 4 The Contribution of Policies to the Development of Brazils Ethanol Sector ............... 21 Challenges for the Brazilian Ethanol Industry.......................... 26 Future Perspectives for Brazils Ethanol Industry.......................... 30 Conclusions ...................... 36 References ........................ 38 Appendix .......................... 44
Acknowledgments
The author thanks all reviewers for comments, feedback, and suggestions, including Mary Anne Normile, Molly Garber, Rip Landes, William Coyle, Erik Dohlman, Kim Hjort, and Fred Gale of USDA, Economic Research Service (ERS); Alan Hrapsky, Michelle DaPra Wittenberger, and Sergio D.S. Barros of USDA, Foreign Agricultural Service (FAS); David Stallings of USDA, World Agricultural Outlook Board, Ofce of the Chief Economist (OCE); and Hosein Shapouri of USDA, Ofce of Energy Policy and New Uses, OCE. Special thanks to Joel Velasco and Luciano Rodriguez from the Brazilian Sugarcane Industry Association for a thorough review and helpful comments, which signicantly improved the study. Thanks also to Chris Dicken of ERS for geographic information system analysis and cartographic output, Heloisa Burnquist of the Center for Advanced Studies on Applied Economics for expert comments and sharing of data, and Douglas Newman of U.S. International Trade Commission for sharing ethanol trade data and expert review comments. The author appreciates and acknowledges the editorial and design assistance of John Weber and Curtia Taylor of ERS. Some information in this report was obtained through activities funded by the Emerging Markets Program of FAS.
Approved by USDAs World Agricultural Outlook Board
Introduction
Ethanola fuel produced from agricultural and other organic materials (biomass)is considered to be one of the best alternatives to petroleum for transportation fuel, as increased ethanol use reduces the levels of carbon monoxide and carbon dioxide (CO2) emissions relative to fossil fuel use. Tropical sugarcane is also cited as the most efcient ethanol feedstock in terms of greenhouse gas (GHG) emissions avoided per hectare cropped per year (1 hectare = 2.47 acres). A recent study found that the use of sugarcane ethanol in Brazil resulted in a reduction of 600 million tons in CO2 emissions since 1975, an amount equivalent to about 7 percent of Brazils total CO2 emissions from the consumption of energy over the same period (UNICA, 2010a; EIA 2010a). Moreover, the Environmental Protection Agency (EPA) deems sugarcane ethanol an advanced biofuel that reduces GHG emissions by 61 percent, compared with gasoline GHG emissions (EPA, 2010). The ethanol energy yield ratio, which relates the energy output of ethanol to the fossil energy input used in its production, is often cited as evidence of the benets of ethanol derived from biomass. The energy yield ratio of sugarcane-based ethanol is 4 to 6 times greater than the energy yield ratio of corn-based ethanol (von Blottnitz and Curran, 2006; Macedo and Seabra, 2008; Shapouri et al., 2010). Because of these outcomes, many countries have implemented energy policies that call for increased ethanol use in their transportation sectors. Ethanol is used in blends with gasoline and in dedicated 100-percent ethanolfueled vehicles. Ethanol is produced from feedstock containing natural sugars or starch that can be readily converted to sugar. Feedstock used to produce ethanol includes sugarcane, corn, sugar beets, and wheat. Recent technological advances have identied other renewable energy products, including cellulose ethanol, which is derived from cellulosic feedstock crops such as switchgrass, mixed-species grass, restored prairie, miscanthus, poplar, sugarcane bagasse, straw, and other plant wastes (James et al., 2009). Ethanol produced in Brazil is derived from sugarcane. Brazils ethanol production in 2010 (31 billion liters) (1 liter = 0.26 gallons) was equivalent to 38 percent of worldwide ethanol production, second only to the United States (49 billion liters), the worlds leading producer since 2006 (EIA, 2010b). In Brazil, two types of ethanol are producedanhydrous (pure ethanol) and hydrous. Anhydrous ethanol is typically blended up to 10 percent with gasoline for use in unmodied engines, to a maximum of 25 percent in Brazil with modications to the engine calibration system to detect the higher oxygen of ethanol blends (UNICA, 2009). Hydrous ethanol (E100) is used in 100-percent ethanol-fueled vehicles and the newer ex-fuel vehicles, which are powered by gasoline (E25) and ethanol (E100, hydrous) in any proportion in a single tank of fuel. Ethanol accounts for more than 56 percent of gasoline use in Brazil (including hydrous plus anhydrous ethanol), compared with 8 percent in the United States. Production and use of sugarcane-based fuel ethanol in Brazil began in 1975 when the Alcohol Program (Prolcool) was launched in response to soaring oil prices and a crisis in the international sugar market. The program resulted in new commercial uses for sugarcane and made Brazil a pioneer in the use
2 Brazils Ethanol Industry: Looking Forward / BIO-02
Economic Research Service/USDA
of ethanol as a motor vehicle fuel. Brazils development in this area was facilitated by the countrys availability of feedstock, a supportive ethanol policy environment, and efciency improvements in cane production and ethanol conversion processes. Until 1999, the countrys supply of feedstock was stimulated by decades of Government support provided through controls over producer prices for sugarcane: the Government set prices along the sugarcane and sugarcane products chain, established production and marketing quotas for both sugar and ethanol, and was the only domestic distributor and exporter of sugar and ethanol (OECD, 2005). To stimulate demand, the Government implemented ethanol legislation that established mandatory blending targets and subsidized continuous advances in the automobile industry for more efcient use of ethanol. Brazil is now challenged with sustaining production growth in the ethanol sector to meet increasing domestic demand and, at the same time, maintain its position as a major supplier of ethanol to world markets that are growing rapidly in response to their own ambitious targets for renewable energy use. This study examines the historical development of Brazils ethanol programs, the factors that gave shape to the current structure of the industry, and the potential challenges over the next decade.

Ethanol Feedstock, Industrial Processing, and Distribution

The sugarcane sector is a major component of the Brazilian economy. With a value added of around $33 billion annually, the output from the sugarcane and sugarcane products chain makes up about 2.3 percent of Brazils Gross Domestic Product (GDP) and 15 percent of value added in Brazilian agriculture (IBGE, 2010b). In 2008, the sector generated 4.4 million jobs1 million directly and 3.4 million indirectly (CAGED, 2009).
Sugarcane Production
Sugarcane is cultivated in most Brazilian States. The spatial distribution of sugarcane in Brazil is divided into ve regions (Southeast, South, Center-West, North, and Northeast) dened by State boundaries and similar characteristics regarding climate, topography, soil, natural vegetation, and agricultural land use (g. 1). Sugarcane in Brazil is grown under rainfed conditions, and planting occurs year round, but 75 percent of planting takes place in January-June (Southeast, South, and Center-West), and May-October (North-Northeast) (CONAB, 2010). New cane cultivars with different maturation times allow for continuous harvesting over 8 months (April-November) across regions in Brazil, which contributes to low costs of production (IDEA, 2006). Sugarcane area has expanded considerably, growing 3.3 percent per year from 1975 to 2010, four times the annual average growth for total area harvested for all eld crops in Brazil. Harvested cane area rose from 4.3 million hectares in 1990 to 9.2 million hectares in 2010, equivalent to 15 percent of total area harvested in the country (IBGE, 2010a). Sugarcane is Brazils third-leading crop in terms of area harvested, after soybeans (23.3 million hectares per year) and corn (12.9 million hectares per year). About 68,000 farms in Brazil produce sugarcane (IBGE, 2010a). Growth has not been steady, as the expansion of area harvested to sugarcane has responded to policies affecting both the sugar and ethanol sectors, as well as external market circumstances. During the the rst 14 years of Prolcool (1975-89), area harvested to sugarcane grew at a rapid 5.6 percent per year, only to slow in the 1990s, particularly in the Northeast, because of nancing difculties (IBGE, 2010a). Since 2003, after the introduction of the rst exfuel vehicles in Brazil, sugarcane area has grown 9 percent annually, with close to 4 million new hectares added during the period (IBGE, 2010a). Brazils sugar industry was rst established in the Northeast region, which includes Alagoas and Pernambuco States;1 the region now (2010) accounts for 10 percent of the countrys sugarcane production. Characterized as a region with relatively low population and low per capita income, the Northeast has beneted from its geographical proximity to the U.S. market and the Brazilian Governments allocation of the U.S. sugar import quota to Brazil.2
reports that initially, the most productive region and site of the countrys rst sugar-producing center was the present-day Northeastern State of Pernambuco, run by Portuguese Crown appointee Duarte Coelho; eventually, sugarcane spread to areas in the present-day States of Bahia, Rio de Janeiro, and So Paulo (UNICA, 2010a).
2For scal year 2010, Brazils allocation was 152,691 tons.
1UNICA

Figure 1
Brazilian States and regions
RORAIMA (RR)
AMAP (AP) RIO GRANDE DO NORTE (RN) CEAR (CE) PARABA (PB) PERNAMBUCO (PE) ALAGOAS (AL) SERGIPE (SE)
AMAZONAS (AM)
PAR (PA)
MARANHO (MA) PIAU (PI)
ACRE (AC) RONDNIA (RO) MATO GRO SSO (MT)
TOCANTINS (T0)
BAHIA (BA)
GOIS (GO) MINAS GERAIS (MG) SO PAULO (SP)
DISTRITO FEDERAL (DF) ESPRITO SANTO (ES)
Brazilian States and regions Center-West Northeast North Southeast South
MATO GRO SSO DO SUL (MS)
RIO DE JANEIRO (RJ)
PARAN (PR) SANTA CATARINA (SC) RIO GRANDE DO SUL (RS)
Source: USDA, Economic Research Service using data from IBGE (2006).
The Southeast-South regions, with better soils and climate than the other regions, are ideal for the cultivation of sugarcane and many other crops (e.g., coffee, citrus, feed crops). So Paulo, in the Southeast region, is Brazils leading cane-producing State and accounts for two-thirds of total sugarcane production (table 1). From 1990 to 2010, sugarcane area in So Paulo increased just under 5 percent per year, or more than 3 million hectares over the period. About 20 percent of this amount, or 644,000 hectares, was previously planted to coffee, corn, and soybeans. Typically, in any given year in the Southeast-South regions, about
Table 1
Cane area, yields, and production in Brazil, by region and State

Area planted to sugarcane Major sugarcane regions/States 1990 2000 Hectares (thousands) Brazil total Southeast So Paulo Minas Gerais Northeast Alagoas Pernambuco Center-West Goias Mato Grosso Mato Grosso do Sul South Paran North 4,273 2,357 1,812 298 1,477 559 467 216 98 67 51 207 159 16 4,805 2,979 2,485 291 1,061 448 304 373 139 99 135 375 327 16 9,191 6,001 5,034 752 1,274 416 427 1,200 573 405 222 689 653 27 2010 Average annual growth, 1990-2010 Percent 3.7% 4.5% 4.8% 4.6% -0.5% -0.5% -1.1% 8.4% 8.5% 8.5% 8.1% 5.9% 6.8% 3.1% Yields, 2010 Tons/ha 79.7 83.4 85.0 81.6 56.4 61.8 54.0 82.1 82.9 86.2 72.4 82.4 84.6 65.3 Production, 2010 1,000 tons 729,561 500,639 427,946 61,343 71,867 25,708 23,053 98,476 47,526 34,851 16,098 56,817 51,244 1,762
Source: USDA, Economic Research Service using data from IBGE (2010a).
12 percent of the cane is rotated to other crops (corn, soybeans, and peanuts) (IBGE, 2010a). Productivity increases are at the center of sugarcane growth. Continuous improvements in sugarcane productivity since the 1970s have boosted yields by almost 34 tons per hectare to the current (2010) national average of 79.7 tons per hectare (see table 1). Gains in yields, however, differ at the State level and across municipalities; in the most productive municipalities (located in the State of So Paulo) yields are 20-25 percent above the national average (IBGE, 2010a). Yield variation is linked not only to weather patterns and varieties planted but also to the own crops harvesting system. Cane harvesting is done by stem cutting, in which the rst cut is made 18 months after planting and then annually for 5 years, with yields decreasing for each of the 5 stubble cuts. Yields obtained for the 1-year-old sugarcane decrease 10-30 tons per hectare for the second, third, fourth, and fth cuts. In any given year, about 20 percent of the cane area on a farm is undergoing replanting, and 13 percent of sugarcane production is from the fth cut (MAPA, 2009a). The development of higher yielding cane varieties in Brazil has been a principal focus of research aimed at attaining higher sucrose content and higher stalk water content. Other characteristics of improved varieties include increased resistance to pests and diseases, upright appearance (more suitable for mechanized cutting), lower soil fertility requirements, upright leaves (permitting closer row-plantings), and higher drought resistance. Genetically modied (GM) cane varieties with higher sucrose yields have been available since the mid-1990s (Burnquist and Ulian, 2000), but there is still no approval of GM sugarcane in Brazil.
As a result of gains in yields and area, sugarcane production in Brazil grew 9 percent per year from 2000 to 2010. Brazil is now the worlds largest sugarcane producer (730 million tons in 2010), accounting for one-third of world production, ahead of India and China (USDA/FAS, 2010). The participation of independent farmers in the supply of cane to the mills and distilleries remained fairly constant under Prolcool and throughout the early 1990s but has since decreased as Brazilian mills and distilleries now own two-thirds of total area harvested to sugarcane in the country (g. 2) (IBGE, 2010a). The average industrial yield measured as total sucrose content (total recoverable sugars, or TRS) is the basis used to determine the price to pay sugarcane suppliers. Before 1997, the Brazilian Government established sugarcane prices prior to the harvest based on regional cost estimates. After deregulation, the So Paulo mills established a new sugarcane payment system named CONSECANA,3 a private system that incorporates the TRS content in sugarcane (measured as the cane yield in kilograms of TRS per ton of cane) and the prices for sugar and ethanol in both the domestic and the export markets. This system, although not mandatory, is used in other major producing States, such as Paran, Alagoas, and Pernambuco (Burnquist, 2001). Large sugarcane farms can reduce production costs through economies of scale; Brazilian mills and distilleries are more responsive to sugar price changes than individual farmers (IBGE, 2010a).
3For a detailed description of the system, see Burnquist, 2001.
Ethanol Production Process

Harvested sugarcane is delivered to mills and distilleries, where the cane stalks are rst weighed and samples are taken to measure the sucrose content in the cane juice (at a ratio of 70 to 91 percent) and the ber content (which ranges from 8 to 14 percent), both of which are inputs to the ethanol production process (g. 3). After samples are taken, the sugarcane is washed and soaked and the stalks are crushed to extract the cane juice. The resulting cane
Figure 2
Sugarcane production by mills/distilleries and farmers

Million tons
800 700 600 500 400 300 200 100 0 1990 92
Cane farmers
Mills/distilleries
94
96
98
2000
02
04
06
08
10
Source: USDA, Economic Research Service using data from IBGE (2010a) and MAPA (2009a).

Figure 3
Ethanol production process
Sold to the Power Grid Electricity Cogeneration (bioelectricity) Sugar Production
For the Mill
Bagasse(crushed cane stalk)
Sugarcane
Cleaning and Crushing
Cane Juice
Juice Treatment
Molasses
Vinasses
Bagasse & Leaves
Hydrolysis
Fermentation
Distillation Process
Hydrous Ethanol
2nd Generation Processes Dehydratation Anhydrous Ethanol
Source: USDA, Economic Research Service using data from CONAB (2008) and MME/EPE (2010b).
juice output is distilled and puried to obtain two types of ethanol: anhydrous ethanol (a gasoline additive) and hydrous ethanol (a gasoline substitute). On average, 1 ton of sugarcane produces 90 liters of hydrous ethanol and 85 liters of anhydrous ethanol. In terms of sucrose content (or TRS), 1.765 kg TRS yields 1 liter of anhydrous ethanol and 1.6913 kg TRS yields 1 liter of hydrous ethanol (MAPA, 2009a). A byproduct of sugar production is molasses, used as a raw material to obtain ethanol through fermentation (1 ton of sugarcane will yield 118 kg of sugar and 10 liters of ethanol from molasses) (UNICA, 2008). On average, about 75 percent of ethanol is produced from the cane juice and the other 25 percent comes from molasses (MME/EPE, 2010b). Vinasse, a potassium-rich byproduct of the distillation process, is recycled as a fertilizer and applied to cane elds. In the past, the disposal of vinasse at river basins posed a major environmental problem for the ethanol industry (de Olivera et al., 2006). Another sugarcane product is bioelectricity generated for use by the mills and distilleries from the crushed sugarcane stalks (bagasse) and cane trash. Most mills are self-sufcient in energy, and most are able to sell any excess amounts to the electricity grid; the bagasse itself can also be sold (see g. 3 for processes for converting bagasse through hydrolysis).
For years, the ratio of sugarcane used for sugar and for ethanol production in Brazil was a policy instrument used to regulate sugar production to counter oversupply of sugar and low international sugar prices. The share of sugarcane crushed for sugar or ethanol production depends on the relative prices of sugar and ethanol. In the early years of Prolcool, sugar production accounted for a larger share of cane than ethanol. At times when international sugar prices are high, sugar production and exports take precedence over the production of ethanol. Currently (in 2010/11), around 55 percent of sugarcane crushed is being distilled into ethanol, and the remainder is used for sugar production. The ratio is set by millers before harvest and is based on expected prices and market demand. Mills have a 5- to 10-percent margin for change in the composition of production (CONAB, 2008). Most mills in So Paulo, the largest ethanol-producing State, operate under the 55-45 ratio for ethanol and sugar. In the States of Minas Gerais, Goias, Paran, and Mato Grosso, more sugarcane is distilled into ethanol than is used for sugar production. Products derived from industrial processing of sugarcane include sugarcane juice, molasses, bagasse, hydrous ethanol, anhydrous ethanol, and alcohol for industrial uses (plus raw sugar and rened sugar produced at the mixed distilleries/mills). Over 73 percent of total ethanol produced in Brazil is hydrous ethanol, and 27 percent is anhydrous ethanol. Since the introduction of ex-fuel vehicles in 2003, production of hydrous ethanol has increased about 25 percent annually, while production of anhydrous ethanol to blend with gasoline has declined 1 percent annually. Ethanol yields have more than doubled since the early 1970s, rising from 40 to about 100 liters of ethanol per ton of cane. Millers have increased industrial efciency by introducing new cane grinding systems, improving distillation processes, and reducing the ethanol processing time. Between 2000 and 2007, ethanol yields from sugar increased by 45 percent (CONAB, 2008). Innovations in industrial processes include the use of byproducts, such as cane molasses to produce ethanol and bagasse to generate heat and electricity. Molasses use for producing ethanol increased 9 percent annually in 2000-2009, and the use of bagasse grew 8 percent per year in the same period, which reects processors increasing use of cane byproducts for ethanol production (table 2).
Ethanol Plants and Regional Production

In 2010, Brazil had 430 ethanol-producing plants (distilleries and mixed sugar-ethanol processing mills) (UNICA, 2010a), compared with about 170 ethanol facilities operating in the United States (EIA, 2010b). Eighteen percent of the mills/distilleries are large plants processing over 4 million tons annually (most are in the States of So Paulo, Goias, and Mato Grosso), 69 percent are medium-size plants processing less than 2 million tons per year, and 13 percent are smaller plants processing less than 1 million tons per year (CONAB, 2008). In crop year 2009-10, autonomous distilleries crushed 15 percent of the sugarcane crop; these mills are not able to produce sugar (Velasco, 2010).

Table 2
Sugarcane byproducts for ethanol production in Brazil

Ethanol production process Inputs (million tons) Sugarcane Sugarcane juice Molasses Bagasse Ethanol (billion liters) Anhydrous Hydrous 326.1 73.0 7.2 66.3 10.7 5.6 5.1 344.3 72.9 9.0 78.0 11.5 6.5 5.0 364.4 77.0 10.3 87.2 12.5 7.0 5.5 396.0 89.1 11.2 97.3 14.4 8.8 5.6 415.2 92.0 11.8 101.8 14.7 7.9 6.8 423.0 97.9 12.5 106.5 16.0 8.2 7.8 477.4 107.1 14.4 121.2 17.7 7.9 9.8 549.7 141.3 16.2 134.6 22.6 8.3 14.3 645.3 181.6 15.9 144.4 27.2 9.6 17.6 729.6 172.8 16.3 148.0 26.1 7.0 19.1 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: USDA, Economic Research Service using data from IBGE (2010a) and MME/EPE (2010b).
Brazils ethanol plants are concentrated in the Southeast-South region (g. 4). Most distilleries are located in So Paulo (53 percent), Minas Gerais (16 percent), and Paran (14 percent). These States include several large cities with high per capita incomes and large automobile industries. The Prolcool program helped attract domestic and foreign investment to these regions to establish sugar mills with annexes for the distilling of fuel ethanol and independent ethanol plants. The newest ethanol-producing region is the CenterWest (Gois, Mato Grosso do Sul, and Mato Grosso). The rapid growth of the industry in Brazil is evidenced by the large number of plants established over the past 5 years alone: since 2006, 138 new ethanol plants have come into production, with most (94) located in So Paulo (ANP, 2010). From 2000 to 2009, ethanol production increased 11 percent per year, reaching 26 billion liters in 2009 (ANP, 2010). In 2009, So Paulo distilled 15 billion liters of ethanol (58 percent of total production in Brazil), including 10.9 billion liters of hydrous ethanol used in ex-fuel cars (57 percent of total) and 4.2 billion liters of anhydrous ethanol for blending in gasoline (59 percent of total). In that same year, Minas Gerais and Paran distilled 2.3 billion liters and 1.9 billion liters of ethanol, respectively (table 3). Three-fourths of this amount distilled was for ex-fuel cars. In the Center-West region, output has increased 15 percent yearly since 2000, above the rates of growth for all other regions and Brazil as a whole, a reection of new investments in cane production and distilleries being set up in Mato Grosso, Mato Grosso do Sul, and Goias.
Ethanol Production Costs

The average cost of producing ethanol at Brazilian distilleries in 2008 was estimated at $0.48 per liter (table 4). Costs include feedstock costs, labor expenses, interest payments on operating loans, energy costs, and xed costs, such as depreciation. Average production costs for ethanol in Brazil are estimated to be 58 percent lower than those for corn ethanol produced in the United States, 30 percent lower than those for wheat ethanol, and 28 percent lower than those for beet ethanol produced in the EU (F.O. Licht, 2006). Brazils production costs are lower because of the competitive pricing
Figure 4
Distribution of mills and distilleries, 2010
North
Northeast
Center-West Distribution of sugar mills, 2010 Sugar mills Distilleries Mixed plants Sugar mills only Hectares of sugarcane harvested by municipality Less than 5,000 5,001-10,000 10,001-20,000 Greater than 20,000
Southeast
of the raw material (sugarcane), as feedstock purchases represent the largest cost component. In 2009-10, feedstock purchases accounted for 60 percent of total ethanol production costs in Brazil (UNICA, 2010a). Average Brazilian ethanol production costs dropped from a high of $0.47 per liter in 1996 to average levels of $0.21 per liter in 1998-2002 (table 4). Distillers costs have since increased due to higher energy, fertilizer, and land prices, and they reached a new high of $0.48 per liter in 2008. Ethanol costs in Brazil vary across regions as wellcosts are lowest in the Southeast-South, where the bulk of the countrys sugarcane is produced and sugarcane costs are lower. The cost of producing ethanol also varies by the time of year, as supplies of the raw materials uctuate. Of signicant importance to cost competitiveness in the sector are gains in industrial efciency at the mill. Since 2000, industrial yields for ethanol production have grown 4 percent per yeardouble the rate in 1990-99, as farmers have continually adopted new and more efcient technologies (g. 5).
Table 3
Brazils ethanol plants and ethanol production by State

Plant location regions/States Southeast So Paulo Minas Gerais Rio de Janeiro Espiritu Santo Northeast Alagoas Pernambuco Other Center-West Goias Mato Grosso Mato Grosso do Sul South Paran Rio Grande do Sul North Total number of distilleries/capacity Plants in 2009 Number 314 259 41 8 6 71 20 21 30 63 33 10 20 39 37 2 5 492 Ethanol production in 2009 Billion liters 17,676 15,041 2,284 113 238 2,211 791 469 950 4,263 2,122 810 1,331 1,901 1,899 2 52 26,103
Sources: USDA, Economic Research Service using data from MAPA (2009) and MME/EPE (2010b).
Table 4
Ethanol production costs in Brazil

1996 Operating costs Feedstock (cane) Labor Maintenance Chemicals Energy Interest payments on working capital Rent Other Fixed costs Depreciation Other Total 0.3720 0.1926 0.0737 0.0109 0.0281 0.0035 0.0023 0.0026 0.0583 0.0933 0.0903 0.0029 0.4653 1998-2002 0.1603 0.0835 0.0228 0.0065 0.0142 0.0021 0.0012 0.0004 0.0296 0.0451 0.0428 0.0023 0.2054 2005 0.1880 0.0907 0.0309 0.0121 0.0132 0.0060 0.0024 0.0012 0.0315 0.0325 0.0312 0.0013 0.2205 2006 0.2156 0.1127 0.0356 0.0146 0.0138 0.0059 0.0025 0.0029 0.0277 0.0373 0.0360 0.0012 0.2528 2007 0.2336 0.1091 0.0493 0.0141 0.0164 0.0070 0.0044 0.0028 0.0305 0.0662 0.0633 0.0029 0.2998 2008 0.3837 0.1496 0.0960 0.0354 0.0185 0.0090 0.0078 0.0066 0.0608 0.0961 0.0896 0.0065 0.4798 Dollars per liter
Source: USDA, Economic Research Service using data from IBGE (2010b).

Figure 5
Productivity of Brazilian ethanol and sugarcane

Liters of ethanol/tons of cane 90 80 70 60 50 50 40 40 30 20 10 0 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
Source: USDA, Economic Research Service using data from MAPA (2009a).
Tons of cane/ha 100 Liters of ethanol/Tons of cane 90 80 70 60
Tons of cane/ha
30 20 10 0
Delivery costs from the mills/distilleries to collection centers range from $0.10 to $0.14 per liter (SIFRECA, 2010), bringing total costs of ethanol delivered to the collection (wholesale) centers to $0.39-$0.43 per liter ($1.48 to $1.63 per gallon) in Brazil, compared with around $0.60 per liter ($2.45 per gallon) in the United States (EIA, 2010b). Current installed capacity for ethanol-only pipelines in Brazil is 10 billion liters, equivalent to just 2.4 percent of total global use (TRANSPETRO, 2009). An earlier study found that pipelines account for 76 percent of ethanol transported from the mills/distilleries to the collection centers, roads account for 16 percent, and waterways account for 8 percent. Ethanol is transported between collection centers by rail (61 percent), roads (31 percent), and waterways (8 percent). Trucks transport ethanol to distributors trucks (see Osrio Xavier et al., 2008). Delivery costs reect the regional clustering of ethanol production and the distribution logistics involving an extensive network of highways, railroads, and some waterways. At the lower end of costs are shipments from the Southeast region (So Paulo) to collection centers, with higher costs for deliveries in the Center-West region (ANP, 2010).
Ethanol Prices
Prior to 1997, the Government of Brazil capped ethanol prices at 60 percent of domestic gasoline prices. With deregulation, the Government eliminated the cap but is still intervening in fuel pricing through controls on gasoline prices and a preferential tax treatment on anhydrous ethanol. The Government provides a tax exemption on anhydrous alcohol to blenders as an incentive to ensure ample supply to meet mandated blend rates, but it taxes hydrous alcohol used in ex-fuel vehicles. In addition, ethanol exports are exempt from paying ICMS (value-added tax). Since 2002, average retail
prices of ethanol and gasoline (not adjusted for ination) have risen sharply; ethanol prices have increased faster because gasoline prices are set by the Government and tend to vary less than ethanol prices. Regional variations in prices reect tax differences across States, supply conditions, and storage and distribution costs (table 5). For ethanol to be competitive with gasoline, the price of ethanol needs to be two-thirds lower than the price of gasoline (ANP, 2009). This estimate takes into account the lower energy content of ethanol (meaning that ethanol provides fewer miles per liter than gasoline). Since 2000, the nationwide price ratio of ethanol to gasoline has been below this margin, averaging around 60 percent (g. 6). The price ratio of ethanol to gasoline differs across States because hydrous ethanol is subject to different tax rates. So Paulo, which levies the lowest tax, has the lowest ethanol price in Brazil and serves as the benchmark for domestic and export values (app. table 1).
Ethanol Distribution and Transport Infrastructure

The distribution of ethanol uses the same crude oil transport network controlled by Brazils State-owned oil company PETROBRAS and its subsidiary company TRANSPETRO, which operates the transport network (6,437 kilometers of pipelines, 156 storage facilities, and 44 export terminals). During Prolcool, PETROBRAS was the sole distributor of ethanol for Brazils domestic and export markets, but since 1997, mills and distilleries have sold all ethanol for domestic consumption to the 205 GovernmentTable 5
Regional ethanol and gasoline prices in Brazil

Regions/fuel type Southeast Ethanol Gasoline Northeast Ethanol Gasoline Center-West Ethanol Gasoline South Ethanol Gasoline North Ethanol Gasoline National average prices Ethanol Gasoline 0.47 0.76 0.38 0.60 0.48 0.69 0.47 0.74 0.64 1.00 0.84 1.21 0.83 1.33 0.89 1.41 0.83 1.30 0.55 0.81 0.45 0.63 0.57 0.72 0.56 0.77 0.76 1.05 0.99 1.24 0.99 1.36 1.05 1.47 0.96 1.37 0.45 0.75 0.37 0.61 0.46 0.70 0.45 0.74 0.62 1.01 0.82 1.21 0.79 1.30 0.83 1.38 0.79 1.27 0.46 0.75 0.38 0.60 0.47 0.69 0.47 0.75 0.64 1.00 0.84 1.22 0.80 1.35 0.89 1.41 0.82 1.32 0.49 0.75 0.39 0.60 0.50 0.68 0.49 0.73 0.69 0.99 0.87 1.23 0.88 1.35 0.96 1.43 0.88 1.31 0.40 0.73 0.33 0.58 0.41 0.66 0.37 0.69 0.50 0.93 0.68 1.14 0.68 1.26 0.72 1.33 0.69 1.22 2001 2002 2003 2004 2005 Dollars per liter 2006 2007 2008 2009
Source: USDA, Economic Research Service using data from ANP (2009).

Figure 6
Average ethanol and gasoline prices in Brazil

$/liter 1.60 1.40 1.20 1.00 Ethanol price (left axis) 0.80 0.40 0.60 0.30 0.40 0.20 0.00 1994 So Paulo ethanol prices (left axis) 0.20 0.10 0.00 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 0.50 Ethanol -gasoline price ratio (right axis) Gasoline price (left axis) Ratio 0.90 0.80 0.70 0.60
Source: USDA, Economic Research Service using data from ANP (2009).
authorized distributors. Ethanol exports, on the other hand, are handled by mills/distilleries and domestic distributors (CONAB, 2008). Ten rms control 76 percent of the domestic distribution market, with BR (PETROBRAS retail network of stations) alone holding a 22-percent market share (ANP, 2009). Given the seasonality of ethanol production, distributors purchase ethanol throughout the year based on demand, leaving storage of off-season supplies to mills and distilleries. In 2007, Brazilian mills and distilleries totaled 11.6 billion liters of storage capacity (45 percent anhydrous and 55 percent hydrous ethanol), equivalent to 56 percent of total ethanol production in Brazil that year. So Paulo alone accounted for 56 percent of total mills storage capacity (CONAB, 2008). Storage capacity at the plants constructed under Prolcool is about 60 percent of production capacity, compared with 40 percent at new plants (Osrio Xavier et al., 2008). After receiving the ethanol from the mills and distilleries, distributors transfer the ethanol to any of PETROBRASs nine ethanol collection centers: ve in So Paulo and one each in Paran, Brasilia, Rio de Janeiro, and Sergipe. Storage capacity at the collection centers is 105 million liters total, considered low by the Government of Brazil and a constraint to increasing output (ANP, 2009). At the collection centers, the anhydrous ethanol is blended with gasoline (gasoline A, transferred from the reneries to the collection centers by pipeline) at a ratio that ranges from 20/80 to 25/75 to obtain gasoline C. Subsequently, both gasoline C and hydrous ethanol (E100) are sold to 469 retail agents who will sell the product in 37,465 gas stations offering pure ethanol for sale side-by-side with gasoline C (E20 or E25) (BR owns 16,372 of these gas stations) (TRANSPETRO, 2010) (g. 7).
Figure 7
Ethanol transportation infrastructure, 2010
AM
SE BA MT Cuiab Terminal GO
Senador Canedo Terminal MG
MS
Transportation infrastructure for ethanol, 2010 Ethanol collection centers Oil terminals Future oil terminals Ports Future ethanol pipeline Future oil pipelines Oil pipelines
Campo Grande Terminal SP PR So Sebastio Terminal Paranagu Terminal
Domestic Ethanol Consumption

Brazil is the worlds second largest ethanol consumer behind the United States. Brazils ethanol consumption (22.7 billion liters in 2009) accounts for 31 percent of global ethanol consumption (MME/EPE, 2010b; EIA, 2010a). Over 96 percent of the ethanol consumed in Brazil is for fuel, and the remainder is for industrial use. Domestic ethanol demand increased rapidly during Prolcool, with the introduction of the rst pure-ethanol-fueled cars in 1979. During 1979-88, registrations of ethanol-fueled cars increased 43 percent annually, while those of cars running only on gasoline decreased by 13 percent per year. Falling oil prices, rising international sugar prices, and Government efforts to maintain a constant ratio of ethanol to gasoline prices led to ethanol shortages in early 1990 and the eventual disappearance of pure-ethanol-fueled cars from the market by 1999 (ANFAVEA, 2009).
Table 6
Ethanol consumption in Brazil

2000 Total ethanol consumption Anhydrous consumption Fuel Industrial Hydrous consumption Fuel Industrial 12,386 5,933 5,705 228 6,453 5,443 1,010 2001 11,583 6,139 6,008 131 5,444 4,257 1,187 2002 12,516 7,336 7,250 86 5,180 4,344 836 2003 11,912 7,392 7,257 135 4,520 3,762 758 2004 13,291 7,591 7,451 140 5,700 4,835 865 2005 13,989 7,775 7,638 138 6,214 5,656 558 2006 13,435 5,420 5,200 220 8,015 7,095 920 2007 17,276 6,512 6,227 285 10,764 10,366 398 2008 22,804 7,225 6,616 609 15,579 14,666 913 2009 24,269 6,930 6,352 578 17,339 16,323 1,016 Million liters
Source: USDA, Economic Research Service using data from MME/EPE (2010b).
The introduction of ex-fuel cars in 2003 revived hydrous ethanol consumption in Brazil (table 6). Owners of these cars may opt to run them on any fuel combinationfrom 100 percent ethanol to 100 percent gasoline (all gasoline in Brazil is already blended 20 to 25 percent ethanol) based on prices at the retail level. Brazils vehicle eet totals 26 million units (about 10 percent of the U.S. eet size), and ex-fuel cars (about 11 million vehicles) account for 60 percent of total ethanol demand in the country. About 87 percent of new cars and light trucks sold in Brazil are ex-fuel; the remainder (trucks4 and buses) run on diesel (ANFAVEA, 2009). Brazils hydrous ethanol consumption increased an impressive 27 percent annually in 2003-09. Over the same period, anhydrous ethanol consumption decreased 2 percent per year as the lower gasoline demand was not sufciently offset by increases in the blending rate of ethanol in gasoline. In 2009, hydrous ethanol consumption for fuel reached a high of 16.3 billion liters and anhydrous ethanol consumption reached 6.4 billion liters (table 6). Government policies have played an important role in increasing the demand for hydrous ethanol and for increasing Brazils ex-fuel vehicle eet. Automobile manufacturers have been given tax breaks to produce cars that run on hydrous ethanol: in 2004-08, the IPI tax was 6-7 percent lower on ex-fuel vehicles than on gasoline cars, and since December 2008, the new ex-fuel cars (engine displacement of 1,000 cc or less) are exempted from the IPI tax (ANFAVEA, 2009). BNDES-subsidized credit (estimated at $330 million in 2007) available to car manufacturers for operational and R&D activities has also contributed to increases in the ex-fuel vehicle eet and ethanol consumption (Casotti et al., 2008). Ethanol demand in Brazil is highest in the Southeast-South (80 percent of total ethanol consumption). The Center-West and the North-Northeast each account for 10 percent (ANP, 2009). Regional consumption mirrors the location of car manufacturing plants and reects the increasing importance of the newest consumer markets.
4During 1979-89, at the height of Prolcool, a small number of new trucks (10.8 million, or 1 percent of all trucks produced during the period) ran on ethanol.
Ethanol Exports
The size of global ethanol trade grew from about 550 million liters in the early 1990s to 6.4 billion liters in 2010, after peaking at 16.4 billion liters in 2002 (GTIS, 2010). This growth stemmed from a combination of various
country regulations for national biofuels targets, incentives, and mandates for the replacement of gasoline consumption with ethanol. Due to increasing demand, mostly from the United States, Europe, and Asian countries, Brazil has expanded its role as a supplier of ethanol. Up until 2008, Brazil was the worlds largest supplier of ethanol, accounting for over 62 percent of the ethanol export market each year (Brazilian shipments reached a high of 5.1 billion liters in 2008) (GTIS, 2010). The value of Brazils ethanol exports increased 5 percent per year between 2005 and 2010, peaking at $2.4 billion in 2008 as a result of record exports to the United States, which accounted for 32 percent of Brazilian ethanol exports (in value terms) that year (g. 8). U.S. demand during that period was likely boosted by the effects of the Energy Policy Act of 2005, which mandated the use of ethanol in transportation and the elimination of methyl tertiary butyl ether (MTBE) as an additive in gasoline blending in key markets such as California and New York (Westcott, 2007a). As a result, Brazils ethanol exports to the United States increased twice as fast as its exports to the world, despite the 45-cent-per-gallon tax credit for blenders who add ethanol to gasoline and a 54-cent-per-gallon tariff that increased the price of foreign (mostly Brazilian) imports. In 2009, a major shift ocurred as conditions changed in major markets and the United States became the worlds largest ethanol exporter. During the period, U.S. ethanol prices followed the downward trend in global oil prices, while Brazilian anhydrous ethanol prices remained high and became uncompetitive in world markets (LMC, 2011). Brazils decline as an ethanol exporter in 2009 and 2010 is attributed to factors other than the global nancial crisis that started in September 2008, including a strong domestic market, lower supplies due to increased sugar production, and increased sugar exports to India, in response to higher sugar prices. Also, direct exports to the U.S. market benetted from duty drawbacks, but these were effectively eliminated in October 2008 (Shapouri, 2010). Growing capacity and production of ethanol in the Unites States and the EU-27 further contributed to Brazils loss of global ethanol market share. As a result, Brazils ethanol exports in 2009
Figure 8
Brazil's ethanol exports

Billion dollars 2.5 2.0 1.5 1.0 461 0.5 0 2003 2004 2005 2006 2007 2008 2009 2010
Source: USDA, Economic Research Service using data from GTIS (2010).
2,366
1,437
1 ,439 1,338 1,013
743 147

decreased 35 percent to 3.3 billion liters, whereas in 2010 they decreased 63 percent to 1.9 billion liters (GTIS, 2010). Brazil exports both anhydrous and hydrous ethanol, with hydrous ethanol representing 90-97 percent of the value of ethanol exports in most years. Brazil exports ethanol to more than 80 countries around the world; major markets in 2010 included the EU-27, South Korea, the United States, and Japan (table 7). Between 2002 and 2009, Brazilian exports of hydrous ethanol to the Central American and Caribbean countries of Costa Rica, El Salvador, Jamaica, and Trinidad and Tobago accounted for 52 percent of Brazils total ethanol exports. Brazilian ethanol shipped to these countries was re-exported to the United States as anhydrous ethanol under the duty-free Caribbean Basin Initiative (CBI). This program allows a maximum of 7 percent of the United States previous years consumption of ethanol to enter duty free. In 2001-02, over 80 percent of Brazils ethanol exports (a record 21.6 billion liters) were
Table 7
Brazils ethanol exports by country of destination

Destination Value United States EU-27 Japan El Salvador Jamaica Nigeria Costa Rica South Korea Trinidad & Tobago Mexico India Total Volume United States EU-27 Japan El Salvador Jamaica Nigeria Costa Rica South Korea Trinidad & Tobago Mexico India Total 416 314 201 26 132 84 106 238 8 83 439 2,146 231 519 303 159 132 114 125 216 38 95 390 2,502 79 73 40 6 27 20 23 56 2 18 86 461 70 155 90 42 40 34 38 64 11 26 110 743 2004 2005 2006 748 232 94 80 56 19 35 34 31 17 5 1,437 1,514 549 223 182 132 43 91 91 64 49 11 3,097 Million liters 1,532 1,469 261 352 405 92 108 185 222 30 66 5,074 272 882 280 71 438 116 100 314 140 74 368 313 419 262 0 139 80 0 375 7 35 59 2008 756 679 113 151 183 42 47 81 99 14 32 2,366 2009 135 384 109 22 152 49 32 140 48 36 125 2010 186 227 131 0 66 40 0 188 4 20 28 Million dollars
1,338 1,013
3,296 1,899
Source: USDA, Economic Research Service using data from GTIS (2010).

exported to Jamaica and subsequently re-exported back to the United States under the CBI (GTIS, 2010). During that period, CBI exports to such areas as Southern California and the Northeastern United States were less expensive than corn-based ethanol shipped to the same areas from production centers in the Midwestern United States (Moller, 2005). For 2010, the duty-free CBI import quota for ethanol producers and dehydrators was xed by the U.S. International Trade Commission at 2.8 billion liters (F.O. Licht, 2010). The 2005 Central America-Dominican Republic Free Trade Agreement (CAFTADR) with the United States kept the CBI conditions on ethanol imports by the United States for the signatory countries of the agreement. In addition, the CAFTA-DR agreement set specic duty-free quotas for Costa Rica and El Salvador within the overall CBI quota. In 2005-09, Brazils ethanol exports to CBI countries averaged 22 percent of total Brazilian ethanol exports but fell to less than 8 percent in 2010 (GTIS, 2010). Brazils ethanol exports to the EU have increased rapidly since 2007 in response to several market mandates with new blending ratios. A greater proportion of Brazils ethanol exports are going to Asia, where both India and South Korea are facing growing ethanol decits (F.O. Licht, 2010). Despite the large role of Brazil in global export markets, it exports just 13 percent of its total ethanol production. Brazils ethanol export operations are highly diversied: in 2008, 153 registered exporters and 126 large rms accounted for about 98 percent of the countrys ethanol exports (DECEX, 2009). Only four ports possess the infrastructure needed for ethanol exports: Santos in So Paulo (70 percent of the countrys exports), Paranagu in Paran (20 percent), Maceio in Alagoas (7 percent), and Rio de Janeiro (2 percent). The large role of So Paulo reects its large infrastructure of pipelines, storage, and port facilities. Brazils ethanol imports, which averaged less than 300,000 liters in 2004-08, have increased sharply to 3.1 million liters in 2009 and 22.2 million liters in 2010. In 2010, the U.S. supplied most of Brazils ethanol import needs (93 percent) (DECEX, 2009). Most countries use anhydrous ethanol when setting a fuel ethanol standard, but Brazil sets standards for both anhydrous and hydrous ethanol. While ethanol standards in Brazil and the United States have been in place since the 1930s (for anhydrous) and the 1970s (for hydrous), standards in the EU are still being developed in various member countries. Brazils National Petroleum Agency (ANP) species the minimum ethanol content of fuel ethanol to be 99.3 percent, with additional parameters limited to water, color, acidity, and copper content. The U.S. and EU industry standards include additional specications, and the limits for several of the parameters are different from those in the Brazilian standard, and from one another (ANP, 2009).

The Contribution of Policies to the Development of Brazils Ethanol Sector

Brazil has established institutions and a proactive regulatory system for encouraging the development of its ethanol sector, which has helped the country become the worlds leading producer of renewable energy. Policies and programs complementary to economic development plans were designed to modernize and diversify the Brazilian agriculture sector, to expand the countrys agricultural frontier, and to reduce its economic dependence on exports of primary commodities (coffee, sugar, and cocoa). Later, those policies and programs were rened and new instruments were devised in conjunction with establishing and developing the ethanol sector. Current policies support both production and use of ethanol feedstock as well as the development of the ethanol industry.
Policies in Support of Ethanol Feedstock

The most signicant agricultural sector-specic policies have been those aimed at making credit available for production and investment. These policies have been complemented by marketing support programs. Underlying these policies have been strong State support and funding of agricultural research, the opening of Brazils agricultural frontier, and concurrent infrastructure investments. Credit Availability and Market Price Support Financial resources available through Government programs at preferential interest rates for sugarcane production have been increasing in both current and real terms since 2000 as a result of two factors: a Government initiative to provide subsidized credit (8.75 percent subsidized loan rates) to producers planting crops in degraded pastureland (up to 2 million hectares annually) and new credit programs (with participation of the Government and private investors) to increase ethanol production. By 2010, credit available for sugarcane had reached an all-time high of nearly $3.1 billion ($1.7 billion in constant 2000 prices), with 47 percent of that amount allocated to operating capital, 16 percent for marketing purposes, and the remaining 36 percent for investment (table 8). Sugarcane mills and their suppliers may receive operating capital credit to fund input purchases, soil preparation, and new plantings of cane stalks for the second through the fth crop. In 2010, operating credit of $805 million (in real terms) beneted over a third of harvested sugarcane area. As part of the economic reforms of the early 1990s, the Government created new marketing loan programs for agriculture. These programs, still operational, allow farmers to receive short-term loans based on the forward sale of the commodities. These programs include the Nota Promissria Rural (NPR) (Rural Promissory Note), the Nota Duplicata Rural (DR) (Rural Duplicate Note), and the Cdula de Produto Rural (CPR) (Rural Product Note) (MAPA, 2009b). The value of these loans for sugarcane in 2010 was $277 million (in constant 2000 prices), all under the NPR and DR programs. BNDES investment credit for sugarcane planting has also been increasing signicantly
Table 8
Subsidized credit allocations for sugarcane producers and mills

2006 Operating capital Sugarcane production by mills Sugarcane production by farmers Cane replanting (mills and farmers) Sugarcane milling Cane irrigated Cane agricultural zoning Forward sales and marketing loans Sugarcane producer sales to mills Sugarcane producer sales to GOB (NPR,DR) Sugarcane producer sales to GOB (CPR) Investment Sugarcane production capacity Cane planting (mills and farmers) Sugarcane energy cogeneration Total 377 340 29 7 1 0 0 385 3 379 3 312 179 49 84 1,074 2007 688 648 14 20 6 0 0 432 5 427 0 397 320 34 43 1,517 2008 656 618 1 27 9 0 0 340 2 339 0 561 274 41 245 1,557 2009 757 666 0 32 59 0 0 309 4 305 0 449 246 53 150 1,515 2010 805 745 0 22 18 2 18 277 3 274 0 618 376 36 206 1,700 Million dollars, constant 2000 prices
Source: USDA, Economic Research Service using data from BACEN (2010) and BNDES (2009).
in both current and real terms as has subsidized credit under the electricity cogeneration program, which increased 36 percent annually in 2006-10 (table 8). Opening of the Agricultural Frontier Although targeted credit policies have clearly beneted sugarcane production, the policies implemented in the 1970s and early 1980s for land clearing provided the greatest incentive for sugarcane cultivation, propelling Brazil to its current position as the worlds largest sugarcane producer. To facilitate the opening of the frontier, the Government provided subsidized credit for land clearing, machinery, and production through several regional programs to develop agriculture in the Cerrados (grassland/savannah lands). These programs, which had the most impact in the 1960s and expanded in the 1980s and early 1990s, are credited with the rapid increase in soybean area in the Center-West Cerrados region (Schnepf et al., 2001). The expansion of soybean cultivation in the Cerrados indirectly beneted sugarcane production, as the opening of the frontier facilitated the movement of oilseed production from the Southeast and South regions of Brazil and enabled sugarcane to move in (Wilkinson and Sorj, 1992).5 Harvested area of cane in the Southeast and South regions grew 4.4 percent per year in 19602008, increasing from 929,000 hectares in the 1960s to 2.3 million hectares in the 1980s, 4.0 million hectares in the 1990s, and 5.2 million hectares in 2008 (IBGE, 2009a).
5Wilkinson and Sorj indicate that during the 1960s, the Agronomic Institute of Campinas developed a variety, IAC2, for cultivation in the low latitudes typical of tropical and subtropical countries. This was the start of genetic improvements that made possible the expansion of soybeans out of the traditional southern States into the Cerrados region.

The opening of the agricultural frontier operated in conjunction with Brazils Corporation for Agricultural Research (Empresa Brasileira de Pesquisa Agropecuria, or EMBRAPA), the agricultural research agency linked to the Ministry of Agriculture and Food Supply. EMBRAPAs research has focused on developing high-yielding varieties specically adapted to the tropics of the frontier lands, developing pest-resistant/cost-reducing varieties, and nding new uses for agricultural products (ethanol from sugarcane, electricity from excess cane bagasse). In addition to the varietal improvements attained by EMBRAPA, other Government efforts included the creation of the Campinas Agronomic Institute (Instituto Agronomico de Campinas, or IAC) and the subsequent development of the IAC varieties. This was followed by the 1970s research program at Copersucara cooperative of mills and distilleries transformed in 2004 into the Sugarcane Technology Center (CTC), a private nongovernmental organization that developed the SP (So Paulo) varieties. Planalsucar (now Ridesa) developed the RB (Repblica do Brasil) varieties. The most recent program is the private program CanaVialis created in 2003one of the largest cane-breeding programs in the world (Macedo, 2005).
Policies in Support of Ethanol

While the Brazilian Government has provided support to crops used as ethanol feedstock, it has also implemented policies specically designed to support ethanol, including price supports, tax exemptions, guaranteed markets along the supply chain, and mandated blending rates. Macroeconomic and trade reforms have also beneted the ethanol sector. Macroeconomic and Trade Reforms Many of the Brazilian Governments policy instruments and regulations associated with ethanol have mostly focused on agriculture. However, the import substitution industrialization (ISI) development approach implemented in Brazil (and in other Latin American countries) in the 1950s through the 1970s emphasized industrial growth, resulting in a large domestic automobile industry that provided an outlet for increasing supplies of ethanol. The 1988 Constitutional Reform that required the Government to stop intervening in private economic activities led to deregulation in the sugar/ethanol sectors. The Government continued to set production and marketing quotas and prices in the sugar supply chain until the mid-1990s and remained the sole buyer and distributor in domestic and export markets (OECD, 2005). Deregulation in the sugar sector began in 1995 when sugar prices and sugar exports were liberalized and the Institute of Sugar and Alcohol was liquidated; between 1997 and 1999, sugarcane and ethanol prices were liberalized and the State ethanol purchasing and distribution monopoly was eliminated (OECD, 2005). By 1999, prices of both hydrous and anhydrous ethanol were deregulated and the State ethanol purchasing and distribution monopoly, which determined the timing and quantities of ethanol produced and sold in the domestic market, was terminated. In 2000, a new energy law created the National Petroleum Agency (Agencia Nacional do Petroleo, or ANP) to regulate the national oil sector. Currently, ANP sets the standards for gasoline and ethanol products and monitors
quality and prices charged at the pump by distributors of gasoline and fuel ethanol. In 2001, the Government introduced the CIDE (Contribuio de Interveno do Domnio Econmico) program that taxes gasoline C and diesel but exempts hydrous ethanol consumers from paying the tax. Monies collected from this tax are earmarked to fund policies to support the ethanol sector, subsidize transportation of ethanol, fund environmental projects related to the fuel industry, and nance transport infrastructure programs (Dolnikoff and Saes, 2009). Consumption of ethanol continues to be regulated indirectly through obligatory blending of ethanol with gasoline, which has averaged 24 percent over the past decade (MAPA, 2009a). More recently, a tariff of 20 percent on imports of ethanol levied in 2001 was removed in 2010. The 1970s oil crisis and the resulting rise in oil prices occurred when Brazil was importing over 80 percent of its oil needs. At the same time, the sugar sector in Brazil was stressed by low world sugar prices. Thus, in 1975, the Government moved to establish the alcohol program known as Prolcool. This program was designed to replace imported crude oil with domestically produced ethanol by adding ethanol to gasoline. The Government later implemented a policy to promote the use of hydrous alcohol as a gasoline substitute, with the rst cars running exclusively on hydrous alcohol introduced in 1979 during the second oil crisis. Prolcool set the mandated blend to 11 percent in 1976.6 The blend has uctuated between 11 and 25 percent since then, with the Government adjusting the mix requirement according to supply and demand conditions. In January 2010, the blend level was set at 20 percent, down from 25 percent, as a result of falling ethanol stocks (app. table 2). During the Prolcool program and throughout the 1980s, the Government nanced the installation of distilleries annexed to existing mills and distilleries around the country but principally in So Paulo. The program also provided incentives for the private sector to manufacture ethanol-using cars and for consumers to buy them, thus increasing demand for ethanol. This higher demand, however, could not be sustained once oil prices started to fall by the mid-1980s. The decline in ethanol demand was exacerbated by the Governments scal difculties and the reduction in subsidies to the sector. Compounding these difculties, the increase in international sugar prices in the early 1990s resulted in a larger share of Brazils sugarcane being used for domestic sugar production, leaving less for ethanol production. These factors led to severe ethanol shortages by the late 1980s and early 1990s and decreased demand for ethanol-fueled vehicles (MAPA, 2009a). Credit for Ethanol Production Financing for the ethanol sector has risen since the mid-2000s, with the amount of credit granted increasing rapidly and new credit programs being implemented. Funding for ethanol reached $904 million in 2010 (in constant 2000 prices). Over 94 percent of the credit was allocated to investments in distilling machinery and equipment, 3 percent went to operating capital, and 3 percent went to marketing (table 9).
6The Government of Brazil rst authorized the use of a 2- to 5-percent ethanol blend with gasoline in 1931, increasing the blend to 5, 10, and then 15 percent during the 1960s before reinstating the blending practice in 1975 with Prolcool.

Table 9
Subsidized credit allocation for ethanol producers

2006 Operating capital Forward purchases and marketing loans Ethanol marketing (NPR, DR) Investment Distilling machinery and equipment Other production capacity Total 18 1 1 145 143 3 165 2007 39 1 1 567 554 12 607 2008 20 1 1 890 884 6 911 2009 36 3 3 862 855 7 900 2010 26 29 29 849 849 0 904 Million dollars, constant 2000 prices
Source: USDA, Economic Research Service using data from BACEN (2010).
Under the latest (2009-10) Brazilian farm bill, BNDES administered a new ethanol storage program (initiated in May 2009) to offer subsidized storage loans to millers, distilleries, and ethanol cooperatives at a preferential rate of 11.25 percent per year. The agricultural plan allocated $1.2 billion (R$2.31 billion) to nance the storage of up to 5 billion liters (MAPA, 2009b).

Challenges for the Brazilian Ethanol Industry

Brazils ethanol industry faces several challenges related to economic, environmental, and social factors that may affect the ethanol supply chain (agricultural and industrial). Economic factors include changes in the world price of commodities that serve as a feedstock for ethanol or have other uses that compete with sugar, molasses, or bagasse, and changes in the world price of oil, exchange rate movements, and infrastructure constraints along the ethanol supply chain. Environmental factors include concerns about expansion of area of feedstock in the Amazon and Cerrados regions and the effect on deforestation. Social factors are related to impacts on employment from changes in harvesting and processing technologies that may require less labor.
Changes in Commodity/Oil Prices and the Exchange Rate

Fluctuations in commodity market prices can have a great effect on Brazils ethanol sector. For example, upswings or downturns in the international sugar price may result alternatively in a scarcity or surplus of ethanol. In 1988, the increase in world sugar prices led to shortages of ethanol in Brazil. Millers compensated with a mixture of ethanol, methanol, and gasoline, lowering the blend rate to 18 percent anhydrous ethanol content in gasoline. As a result, Brazilian consumers lost condence in Prolcool, and sales of pure-ethanol vehicles dropped dramatically. More recently, from March 2009 to September 2010, the global sugar production decit (resulting from lower supplies from Pakistan and Russia) led to a 51-percent spike in international sugar prices (USDA/ERS, 2010). As a result, Brazilian millers are maximizing their output of sugar to take advantage of its high price relative to ethanol prices; at the same time, Brazilian ethanol prices are not being discounted as aggressively relative to gasoline prices to supply markets (LMC, 2011). Rising ethanol prices make ethanol uncompetitive with gasoline in domestic markets (where the exible-fuel eet continues to expand) and also erode the competitiveness of Brazilian ethanol in international markets, reducing its potential for exports. In January 2010, the Government responded to ethanol price increases by cutting the mandatory amount of ethanol mixed into gasoline from 25 to 20 percent. Changes in world oil prices and domestic gasoline prices will affect the stability of the ethanol/gasoline price relationship under the current ethanolgasoline blending rate. At times when oil/gasoline prices rise, ethanol demand also increases, setting off a surge in investment and construction of ethanol plants. In contrast, when oil/gasoline prices decrease, as was the case in Brazil in 2009, ethanol demand weakens, slowing industry expansion (BNDES, 2009). Exchange rates have been a factor in the year-to-year shifts in Brazils ethanol trade. During the latter half of the 1990s, Brazil fought inationary expectations by pegging its currency to the U.S. dollar. As a result, the value
of the Brazilian real on foreign exchange markets was high relative to earlier years, and, by some measures, the currency was overvalued. In the aftermath of the Asian nancial crisis of the late 1990s, Brazil responded to pressure on world nancial markets by relinquishing the peg with the dollar in January 1999; its currency then depreciated signicantly. As a result, the cost of Brazilian products on world markets, including ethanol, has risen. Partly in response to the strengthening exchange rate, the Brazilian Government has moved to increase support to its ethanol sector.
Infrastructure and Transportation Constraints

Infrastructure and transportation constraints along the ethanol supply chain are major obstacles to Brazils capacity to supply increasing volumes to domestic and world markets. The costs of transporting feedstock are considerable. Fifty-four percent of Brazils harvested cane is transported about 20 kilometers (1 km = 0.62 miles) from the elds to the mills, and over 12 percent of canemostly from larger farmsis transported 40 kilometers or more (CONAB, 2008). As the bulk of ethanol is transported from the processing plants to the PETROBRAS collection centers and to the ports by truck, optimal road infrastructure is critical to maintain future competitiveness of the industry. The cost for truck transportation of the ethanol to ports is high: about $35 to $40 per 1,000 liters from the traditional sugarcane areas in So Paulo and Paran and $22 per 1,000 liters in the Northeast, where mills are closer to ports (CONAB, 2008). Poor roads impose even higher costs on Brazils farmers located in the agricultural frontier in the Center-West region, where new distilleries are being set up and located farther from the ports but where yields are higher. The average distance from the Center-West region to ports is over 1,000 kilometers, and port costs are higher in Brazil than in other countries due to poor port infrastructure. Large investments in maintenance and expansion of road infrastructure are needed to keep up with the expected growth in demand and to lower delivery times and costs. In the past, when Brazil was constrained by infrastructure when exporting sugar, several companies (Copersucar, Cargill, and Cosan) pooled their resources for construction of new terminals for shipping sugar from the ports of Santos and Paranagu, resulting in a decrease in sugar costs from $40-$50 per ton to less than $10 per ton (CONAB, 2008).
Environmental Concerns From Feedstock Area Expansion

The potential expansion in Brazilian ethanol (and biofuels in general) production needed to meet increases in demand has led to frequently cited environmental concerns about the intensied competition for land currently planted to nonfeedstock crops or being used for grazing. This expansion, in turn, would force other crops further west into the Cerrados and Amazon. According to some detractors of the plan, such a change in land use would likely lead to habitat loss on the frontier (Searchinger et al., 2008). The area under threat is Brazils Legal Amazon, an administrative designation that includes the Amazon forest biome7 plus some areas of savannah in Mato Grosso and Tocantins (these two States are also part of the Cerrados). The Legal Amazon covers 127 million hectares (equivalent to about 1.3 times the
7The term biome refers to the ecosystem that sustains native plants and animals.
planted U.S. acreage in 2009), and current estimates indicate that one-third of its area has been deforested (IBGE, 2010a). Activities contributing to the deforestation of the Legal Amazon include cattle ranching, timber extraction, and crop production (principally soybean production). Most of the deforestation is primarily in the State of Mato Grosso. Area planted to cane in the Legal Amazon increased by more than 100,000 hectares between 1996 and 2006, reaching 283,000 hectares in 2007, or 4 percent of the total for the country. Sugarcane expansion in the Legal Amazon has averaged 7 percent per year since 2000. About three-fourths of the expansion occurred in Mato Grosso, but other States in the Legal Amazon (Rondnia and Acre) have also seen increases in cane area since 2000 (IBGE, 2009a). Although the recent growth of Brazils ethanol industry has led to rapid landuse changes favoring sugarcane production, the bulk of land conversion has been in the Southeast and South regions. The Government projects that these areas will remain as the most dynamic regions in terms of land-use change (see next chapter in this report for detailed analysis of future area expansion for feedstock cultivation). To curtail the indirect effects from cane expansion (e.g., the transfer of livestock and crop (soybeans, cotton) production to the Amazons and Cerrados), the Government is enforcing regulations for clearing of the land. Brazils legal framework for the environmental sustainability of food and bioenergy production is included in the Forest Code (Cdigo Forestal) and its Legal Forest Reserve (Reserva Legal, or RL) directive. This directive mandates that farmers outside the Legal Amazon (but located within the Amazon biome) must conserve 20 percent of native vegetation as uncultivated land, while those in the Cerrados (savannah) areas along the frontier with the Amazon are required to keep a reserve of 35 percent; farmers located in the Legal Amazon must conserve 80 percent of the vegetation (MMA, 2008). But the most signicant measure implemented by Brazil to ensuring the sustainable production of sugarcane-based ethanol is the agricultural zoning database, commonly referred to as the Agricultural Zoning Program (AZP). Initiated in 1996 by Brazils Ministry of Agriculture and Food Supply (MAPA) and EMBRAPA, the AZP for sugarcane explicitly forbids cane area expansion in the most sensitive biomes (e.g., Amazon, Pantanal) or through deforestation of native vegetation (e.g., Cerrados) (Desplechin, 2010).
Changes in Harvesting and Processing Technologies

A second environmental issue with important social implications stems from Brazils decades-old practice of clearing land by re. Recent environmental concerns about cane burning and its harmful CO2 emissions are moving the industry toward increased mechanization, particularly in the State of So Paulo, where 46 percent of cane is burned prior to mechanized harvesting and 54 percent is harvested green (IDEA, 2006). As a result, Brazils new countrywide environmental directiveand one modeled after So Paulos denes areas with slopes less than 12 percent as areas apt for mechanized harvesting, which will prevent burning of the cane at harvesting. The schedule for phasing in the practice of increased mechanization in sugarcane
cultivation has been set at a 20-percent mechanization adoption rate by 2010, a 40-percent rate by 2014, and a 100-percent rate by 2017. Despite having positive effects on ethanol production costs, increased mechanization has negative social effects, particularly on cane laborers. In Brazil, harvesting of the cane is done either manually or with mechanical cutters (manual labor accounts for about 71 percent of the harvesting in the Southeast-South and 97 percent in the North-Northeast, employing close to 300,000 workers). The planned increases in mechanization use at harvesting times will affect the workers employed to cut cane. It has been estimated that each mechanical cutter could replace 81 laborers with present technology, but the planned doubling of mechanical cutters by 2015 is projected to lead to an even larger number of cane laborers being forced out of work (CONAB, 2008). To counter this negative effect, a consortium that includes UNICA, the private sector, and international organizations has put in place a retraining program for about 7,000 current and former cane cutters (Velasco, 2010).

Future Perspectives for Brazils Ethanol Industry

The future of Brazils ethanol sector depends on feedstock supply, growth in domestic and international ethanol demand, and new developments that might improve the marketing and distribution of ethanol.
Feedstock Supply for Ethanol Production

Brazils ethanol production will depend on the expansion in feedstock cultivated area, the competition for land with other crops and pasture, increases in feedstock productivity, and efciency improvements in ethanol conversion processes. The outcome from these factors will, in turn, inuence the establishment of new distilleries and the development of infrastructure for the marketing and distribution of ethanol. Area Expansion for Feedstock Cultivation Brazils agricultural area was 76 million hectares as of 2010, and pasturelands stood at 172 million hectares. The scope for cropland expansion in Brazil is estimated at 119 million hectares, with 69 million hectares in Cerrados and 50 million hectares from pastureland conversion (IBGE, 2010a). Based on USDA long-term yield projections, an additional 12 million hectares of cropland will be brought into production by 2020. The expected rate of expansion for new cropland area in Brazil is one of the worlds highest, at 1.9 percent per year over the next 10 years. This expansion is likely to come from converted pastureland (UNICA, 2010a). Sugarcane area is projected to increase from 8 million hectares in 2008 to over 10 million hectares in 2020 (table 10). More rapid sugarcane area expansion is expected in the traditional cane-producing State of So Paulo and in the Cerrados because of increases in capacity utilization in existing mills (continuing the trend of the past 5 years) and the planned opening of new mills now under construction. Brazils most dynamic region for cane production has been identied around four principal areas based on soil and weather characteristics and lower priced land: (1) the northwestern area of the State of So Paulo; (2) the southwestern area of the State of Minas Gerais (known as Tringulo Mineiro); (3) the States of Goias, Paran, and Mato Grosso do Sul; and (4) the new cane frontier in the Northeast and North regions (Bahia, Maranho, Piaui, and Tocantins), where the largest increases in area planted to cane are projected (MAPA, 2010). Effect of Increased Supply of Ethanol Feedstock on Crop and Livestock Sectors According to the Government of Brazil, ethanol feedstock production involves competition for land around three separate regions that are engaged in the production of eld, food, and tree crops that compete with livestock production: the Southeast-South, the Northeast, and the Center-West. Sugarcane production in the Southeast-South region competes for agricultural
Table 10
Current area and additional area expected in sugarcane by 2020

Area in 2008 Sugarcane regions/States Brazil total Dynamic regions So Paulo Minas Gerais Paran Goias Mato Grosso do Sul Mato Grosso Northeast Alagoas Pernambuco New frontier Bahia Maranaho Piaui Tocantins
1Cane
Cane area harvested 8,141,228 6,612,850 4,538,198 608,250 594,585 400,400 252,544 218,873 805,374 434,000 371,374 169,014 101,384 48,685 12,629 6,316
Cane expansion area in 20081 1,246,447 1,162,115 661,874 141,190 97,723 143,157 87,434 30,737 69,654 23,165 46,489 14,678 1,427 10,554 257 2,440
Area harvested to other crops 33,656,496 20,478,032 740,521 3,664,030 5,898,355 2,775,273 1,820,126 5,579,727 4,127,580 402,138 3,725,442 9,050,884 3,564,586 3,514,901 1,380,279 591,118
Pastureland 127,158,308 91,639,409 8,594,106 20,555,061 5,735,095 15,524,699 18,421,427 22,809,021 3,380,552 873,822 2,506,730 32,138,347 12,901,698 6,162,692 2,783,101 10,290,856
Forest area 67,531,310 42,249,693 2,321,255 8,805,707 3,172,889 5,239,876 4,951,044 17,758,922 1,672,395 223,476 1,448,919 23,609,222 9,301,335 4,641,773 4,415,465 5,250,649
Area expected in sugarcane by 2020 10,045,121 7,525,920 1,214,546 1,454,920 736,746 1,135,779 1,191,619 1,792,310 445,061 86,963 358,098 2,074,140 824,741 494,434 208,426 546,539
Hectares
expansion area includes cane area with rst-time cane crops and area harvested to other crops for the past two or more harvest periods and currently harvested to cane. Source: USDA, Economic Research Service using data from IBGE (2010a).
resources with soybeans, corn, tree crops (principally coffee and oranges), and, to a lesser extent, cattle production. In the Northeast, sugarcane production competes with food crops (pulses, tubers, and vegetable crops), corn, and cattle production. In the Northwest region, 45 million hectares are available for agriculture (CONAB, 2008). The recent growth of Brazils ethanol industry has led to rapid land-use changes into sugarcane production. For example, in 2007, over 654,000 hectares of land were converted into sugarcane in Brazil (over two-thirds from converted pastureland), and most of this expansion (94 percent) occurred in the Southeast and South regions. In So Paulo, sugarcane area expansion replaced area planted to soybeans (42,185 hectares), oranges (30,397 hectares), corn (17,292 hectares), coffee (2,284 hectares), other crops/livestock activities (9,750), pastureland (242,146 hectares), and deforested land (7,931 hectares) (CONAB, 2008). The share of Brazils sugarcane being distilled into fuel ethanol is expected to be maintained at around 60 percent through 2019 (MAPA, 2009a). Technological Advances for Feedstock and Ethanol Production Since 2000, sugarcane yields per hectare in Brazil have increased by 33 percent, along with sugar content of cane, ethanol yield from sugar, and fermentation productivity (CONAB, 2008). Research on new varieties is
expected to continue as mills and independent farmers endeavor to diversify their production mix to protect against pests and disease. Through the use of existing varieties, conventional cane yields are projected to increase 2 percent per year. Productivity growth is expected to continue at a rapid pace, particularly in the State of So Paulo, where the adoption of new cultivars has been the most dynamic. The development of new cultivars to counter the excess humidity in the Northeast-North is also expected to boost productivity (CONAB, 2008). Cana Vialis (a Monsanto group company) is developing new cane varieties with more ber to triple the value of biomass, thus obtaining larger production of ethanol from the same quantity of sugarcane. Brazils Sugarcane Technology Center (CTC) and Germanys BASF are jointly developing a GM cane, with yields up to 25 percent higher than those currently available. The future potential for GM cane is not only higher crop yields but a higher percentage of cellulose, which could be used directly to produce ethanol (MME/EPE, 2010a). Brazils current yields of 90-100 liters of ethanol per ton of cane are projected to increase by 80 percent based on new technologies: ethanol from cellulose and a new technology to further process the sucrose content for ethanol production (MME/EPE, 2010a). Production Capacity Expansion and Investment Plans Brazils ethanol industry is operating at 75 percent of the countrys 30-billion liter (7.9 billion gallons) per year installed production capacity. The production capacity of the United States is about 12-13 billion gallons per year (CONAB, 2008; EIA, 2010b). Planned investments include 105 new distilleries by 2013, at a cost of $33 billion (table 11). Since 2004, PETROBRAS has invested in 5 distilleries and plans to construct 15 more and build 2 ethanol pipelines by 2012: a 1,150-km-long pipeline from Buriti Alegre (Gois State) to the Port of So Sebastio (State of So Paulo) and a 525-km-long pipeline from Minas Gerais to the port in Rio de Janeiro. The new pipelines will allow for the transport of about 8 billion liters of ethanol at a cost of R$0.04, compared with the current R$0.13 per liter by truck (VEJA, 2007).
Domestic and Global Ethanol Demand

Crude oil prices in Brazil are projected to grow 7.4 percent annually in 200918, which is expected to lead to lower reliance on fossil fuels and greater use of ethanol (EIA, 2010a). During the same period, a population increase of 23 million and an increase in sales of cars and light commercial vehicles will also help boost domestic demand for ethanol, which is projected to increase 3 percent per year, rising to about 30 billion liters by 2018 (MAPA, 2009c). In Brazil, ethanol use is projected to account for 12 percent of total transport fuel use by 2018 and about 26 percent by 2050 (MME/EPE, 2010a). In addition to the increased demand for ethanol for transport, additional demand is projected from the increased use of bagasse as a renewable energy source in Brazil. Most sugar mills in the world use bagasse to produce electricity and/or steam; but for most mills, the objective is to produce just enough energy to meet a particular mills needs during the processing season. Research ndings suggest that the use of energy-efcient technology can result in the export of at least ve times the amount of electricity that a typical mill consumes while satisfying all of the mills steam and electricity
Table 11
Brazilian ethanol plants, production, capacity expansion by State

Plants and ethanol production in 2009 Ethanol production in 2009 Million liters 17,676 15,041 2,284 113 238 2,211 791.2 469.2 950.1 4,263 2,122 810 1331 1,901 1,899 2 52 26,103 1 105 63 522 46,366 46 23 1 22 3 3 33 4 5 24 3 1 2 4,637 6,957 1 Capacity expansion by 2018 Plants under construction operational by 2013 Number 55 28 26 Total projected plants operational by 2018 Number 27 6 16 4 1 2,318 Projected ethanol production by 2018 Million liters 32,454
Plant location regions/States Southeast So Paulo Minas Gerais Rio de Janeiro Espiritu Santo Northeast Alagoas Pernambuco Other Center-West Goias Mato Grosso Mato Grosso do Sul South Paran Rio Grande do Sul North Total number of distilleries Total production capacity
Plants in 2009 Number 314 259 41 8 6 71 20 21 30 63 33 10 20 39 37 2 5 492
Source: USDA, Economic Research Service using data from ANP (2009) and MME/EPE (2010a).
needs. Bagasse therefore has the potential to become an abundant and stable source of renewable energy, with the consequent global environmental and economic benets. Brazils renewable energy plan (PROINFA) projects that bioelectricity from sugarcane bagasse will supply 20 percent of Brazils electricity needs by 2018, compared with 16 percent in 2008 (MME/EPE, 2010a). World ethanol tradeestimated at 10 percent of world consumption in 2009 (GTIS)is projected to expand over the next decade based on both gasoline consumption forecasts and on renewable energy use mandates in the United States, Brazil, the EU, and other countries. Since 2004, several countries have set energy mandates that encourage the use of agriculture-based ethanol in their transportation sectors. Based on these energy mandates, global ethanol trade is projected to increase 18 percent per year in 2011-18, reaching 16.9 billion liters in 2018. Brazil is projected to supply close to two-thirds of this demand (table 12). A major market for Brazils ethanol exports will be the United States. The U.S. Energy Independence and Security Act of 2007 includes provisions for a Renewable Fuel Standard (RFS) to increase the supply of alternative fuel sources by requiring fuel producers to use at least 136 billion liters of
Table 12
Brazils ethanol export market potential

Net importers Canada European Union India Japan South Korea United States Colombia Rest of the world Total global imports 2011 645 554 91 944 416 1,325 466 893 5,335 2012 728 682 255 987 440 1,863 500 900 6,355 2013 810 793 389 1,025 461 2,745 600 839 7,662 2014 895 901 498 1,061 481 4,176 720 758 9,490 2015 988 1,014 598 1,097 501 5,027 864 653 10,743 2016 1,074 1,141 704 1,136 523 6,542 1,037 520 12,677 2017 1,158 1,244 810 1,170 542 8,416 1,100 496 14,934 2018 1,336 1,435 934 1,225 572 9,712 1,269 453 16,936 Million liters
Source: USDA, Economic Research Service using data from FAPRI (2008) and USDA/FAS (2009).
biofuels by 2022. The RFS provision establishes a level of 57 billion liters of conventional ethanol by 2015 and at least 80 billion liters of cellulosic (noncornstarch) ethanol and advanced biofuels (including ethanol from sugarcane and biodiesel) by 2022. Under this provision, Brazil has the potential to export ethanol to the United States. The United States currently imposes a 54-cent import tariff on imported ethanol and provides a 45-centper-gallon tax credit for blenders who add ethanol to gasoline. Findings in a recent study suggest that elimination of the tariff and the tax credit may reduce U.S. ethanol prices by 12 cents per gallon (3 cents/liter) in 2011 and 34 cents per gallon (9 cents/liter) in 2014, which, in turn, may lower prices for consumers (UNICA, 2010b). In the EU, the Biofuels Directive sets a mandatory minimum share of biofuels in total fuel consumption in the transport sector of 10 percent per member State by 2020. Ethanol consumption in the EU is projected to double to 9 billion liters per year by 2020 (FAPRI, 2008), and Brazil is projected to provide the bulk of the EUs 1.4-billion-liter import need, as well as feedstock for biofuel production.
Life Cycle Analysis (LCA) of Sugarcane Ethanol

Over the past few years, several studies have estimated avoided emissions of greenhouse gases from the use of various feedstocks (including sugarcane) to produce ethanol and replace fossil energy (see von Blottnitz and Curran, 2006, for a detailed review of some of these studies). Macedo and Seabras (2008) analysis of the full life cycle of sugarcane ethanol concludes that ethanol has a signicant effect on the environment and a high net-energy benet. The researchers tracked all the energy used for growing sugarcane and converting the crop to ethanol. They considered the amounts of fertilizer and pesticide required to produce sugarcane and the levels of greenhouse gases, nitrogen, phosphorus, and pesticide pollutants released into the environment. Results suggest that sugarcane ethanol from Brazil signicantly contributes to reductions in greenhouse gas emissions (table 13).

Table 13
Total emissions in ethanol life cycle in Brazil (kg CO2 eq/1,000 liters)
2006 Sugarcane production Farming Fertilizers Cane transportation Trash burning Soil emissions Ethanol production Chemicals Industrial facilities Ethanol distribution Credits Electricity surplus Bagasse surplus Total -74.2 -150.0 268.8 -190.0 0 107.3 416.8 107.0 47.3 32.4 83.7 146.3 24.9 21.22 3.7 51.4 2020 232.4 90.6 23.4 26.4 0 92.0 21.6 18.5 3.2 43.3
Source: USDA, Economic Research Service using data from Macedo and Seabra (2008).

Conclusions
The production and use of ethanol around the world as an alternative to fossil fuel has increased dramatically since early 2000. The volatility in oil prices, combined with energy policies and Government programs in countries around the world to provide economic incentives for ethanol production, are driving the large expansion in global ethanol production (Westcott, 2007b). Ethanol use increased by nearly 350 percent between 2000 and 2010, and world ethanol consumption reached 74 billion liters in 2010. Global ethanol trade increased vefold over the period. Due to increasing demand, mostly from the United States, Europe, and Asian countries, Brazil has expanded its role as a supplier of ethanol. Until 2008, Brazil was the worlds largest exporter of ethanol on an annual basis, supplying over 62 percent of the ethanol traded in world markets. Based on USDA Agricultural Projections to 2020, Brazilian sugarcane-based ethanol production is projected to rise 45 percent during the coming decade, with a growing share of ethanol production projected to be exported in response to demand from Europe, Asian countries, and the United States (USDA, 2011). Demand for ethanol in major consuming countries is on the rise. While Brazil may be best positioned to ll the growing world demand for ethanol based on its low-cost resource base for ethanol production and its ability to expand sugarcane area and increase productivity of both sugarcane and ethanol production, Brazils ethanol export supply depends on its domestic ethanol demand, world sugar and oil prices, its currency exchange rate, and the capacity of its infrastructure to move ethanol to ports. All these factors present challenges to the countrys ability to expand production to meet rising domestic and export demand. The expected level of world sugar prices and the prevailing price of ethanol in Brazils domestic market determine whether its sugarcane is milled for sugar or for ethanol. When world sugar prices are high relative to domestic and world ethanol prices, ethanol exports fall due to reduced supplies. Until 2008, that relationship favored ethanol over sugar. Brazils domestic ethanol prices depend on domestic demand, which has been rising due to increasing mandated blending rates and the increasing popularity of ex-fuel cars. Rising domestic demand pushes domestic ethanol prices to levels that are uncompetitive in the world ethanol market, with the result that less of Brazils ethanol enters export channels. This happened in 2009, when the United States replaced Brazil as the worlds largest ethanol exporter. U.S. ethanol prices followed the downward trend in global oil prices, while Brazilian ethanol prices remained high and became uncompetitive in world markets. U.S. ethanol exporters express concerns about corn price increases, which will have an impact on ethanol prices, and the linkage between biofuels and food ination; in contrast, Brazilian exporters are concerned about rising sugar prices and infrastructure bottlenecks. The complex Brazilian ethanol supply situation may benet U.S. producers. A more lucrative domestic market for Brazilian producers leading to higher ethanol sales in Brazil and lower shipments abroad, as occurred in 2010, may create export opportunities for U.S. ethanol producers. U.S. ethanol produc36 Brazils Ethanol Industry: Looking Forward / BIO-02
tion is expected to continue to grow based on the recent change permitting use of E15 in cars made after 2007 and the renewal of the 45 cents per gallon ethanol blending credit through the end of 2011. Over the next 10 years, USDA projects a growing share of Brazils ethanol production to be exported, but the majority of Brazils ethanol production will continue to be destined for the domestic market. Brazils mills and distilleries project higher ethanol and sugar exports and higher domestic sales of sugar and hydrous ethanol (and lower anhydrous sales) during the period. As ethanol demand increases, land expansion and shifting of crop and pasturelands for feedstock production is expected to continue. Technological advances led by EMBRAPA and private institutions for higher yielding cultivars will continue to foster industry growth. Likewise, technological improvements in ethanol processing, such as the use of sugarcane bagasse to produce ethanol, will continue to lower costs. Industry concentration is expected to increase in the coming years, largely through mergers and acquisitions. These factors favor the ability of Brazilian ethanol producers to meet demand and ensure that Brazil will remain a dominant player in the world ethanol market over the decades ahead.

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Ministrio de Minas e Energia, Empresa de Pesquisa Energtica (MME/EPE) (2010b). Balano Energtico Nacional. Moller, Rosa Maria (2005). The Debate on Ethanol: Prospects and Challenges to California Producers. California Research Bureau. Available online: www.library.ca.gov/crb/05/09/05-009.pdf (accessed May 17, 2010). Newman, Douglas. Ethanol Trade Data. Various years. U.S. International Trade Commission. Organisation for Economic Co-operation and Development (OECD) (2005). Review of Agricultural Policies, 2005. AGR/CA(2005)3. May. Osrio Xavier, Carlos E., Jos E.Holler Branco, Leandro Bernardino de Carvalho, and Jos Vicente Caixeta Filho (2008). Pas deve superar gargalos logsticos para garantir competitividade. Available online: http://log.esalq.usp.br (accessed May 17, 2010). Schnepf, Randall D., Erik N. Dohlman, and Christine Bolling (2001). Agriculture in Brazil and Argentina: Developments and Prospects for Major Field Crops. WRS 01-03, U.S. Department of Agriculture, Economic Research Service, November. Available online: www.ers.usda.gov/publications/wrs013 (accessed May 17, 2010). Searchinger, T., R. Heimlich, R.A. Houghton, F. Dong, A. Elobeid, J. Fabiosa, S., Tokgoz, D. Hayes, and T.H. Yu, 2008. Use of U.S. Croplands for Biofuels Increases Greenhouse Gases Through Emissions From Land Use Change, Science Express 7 February. Shapouri, Hosein (2010). U.S. Department of Agriculture, Ofce of the Chief Economist (OCE), Ofce of Energy Policy and New Uses. Review comments. July. Shapouri, Hosein, Paul W. Gallagher, Ward Nefstead, Rosalie Schwartz, Stacey Noe, and Roger Conway (2010). 2008 Energy Balance for the Corn-Ethanol Industry, Agricultural Economic Report Number 846, U.S. Department of Agriculture, Ofce of the Chief Economist (OCE), Ofce of Energy Policy and New Uses. Sistema de Informaes de Fretes (SIFRECA) (2010). Fretes Rodovirios. Available online: http://sifreca.esalq.usp.br/sifreca/pt/index.php (accessed May 10, 2010). TRANSPETRO (2010). Mapa de Terminais e Oleodutos. Available online: www.transpetro.com.br (accessed January 5, 2011). Tripartite Task Force Brazil, European Union, and United States of America (TTF) (2007). White Paper on Internationally Compatible Biofuel Standards. December 31. Available online: www.anp.gov.br (accessed November 10, 2010).

Unio da Indstria de Cana-de-Aucar (UNICA) (2008). Estatsticas de produo de acar no Brasil. Available online: www.unica.com.br (accessed January 5, 2011). Unio da Indstria de Cana-de-Aucar (UNICA) (2009). Comments on EPA E15 waiver process. Available online: www.regulations.gov/search/regs (accessed January 5, 2011). Unio da Indstria de Cana-de-Aucar (UNICA) (2010a). The Industry Background. Sugarcane: The Economic Cycle. Available online: www.unica. com.br (accessed January 5, 2011). Unio da Indstria de Cana-de-Aucar (UNICA) (2010b). The Economics of U.S. Ethanol Policy. Available online: www.unica.com.br (accessed January 5, 2011). U.S. Congress (2007). Energy Independence and Security Act of 2007. H.R. 6, 110 Congress, 1st session. Available online: www.whitehouse.gov/ news/releases/2007/12/20071219-1.html. (accessed July 20, 2010). U.S. Department of Agriculture, Ofce of the Chief Economist, World Agricultural Outlook Board (USDA) (2011). USDA Agricultural Projections to 2020, OCE-2011-1. February. Available online: www.ers.usda.gov/ publications/oce111 (accessed April 4, 2011). U.S. Department of Agriculture, Economic Research Service (USDA/ERS) (2010). Sugar and Sweeteners Brieng Room. Available online: www. ers.usda.gov/brieng/sugar (accessed January 5, 2011). U.S. Department of Agriculture, Foreign Agriculture Service (USDA/ FAS) (2009). Attach Reports. Available online: http://gain.fas.usda.gov (accessed January 10, 2010). U.S. Energy Information Administration (EIA) (2010a). International Energy Outlook 2010. Report DOE/EIA-0484(2010). Available online: www.eia. doe.gov/emeu/international (accessed January 5, 2011). U.S. Energy Information Administration (EIA) (2010b). Annual Energy Outlook 2010 Early Release 2011. Report No. DOE/EIA-0383ER(2011). Available online: www.eia.doe.gov/oiaf/aeo (accessed January 5, 2011). U.S. Environmental Protection Agency (EPA) (2010). EPA Finalizes Regulations for the National Renewable Fuel Standard Program for 2010 & Beyond. Available online: www.epa.gov (accessed January 20, 2011). VEJA (2007). Revista VEJA, Edio 2040. 26 de dezembro de 2007. Velasco, Joel (2010). Chief Representative in Washington for the Brazilian Sugarcane Industry Association. Telephone conversation. September.

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Appendix
Appendix table 1 ICMS value-added tax on biofuels Fuel ethanol Percent North Par: 30 Others: 25 Alagoas, Sergipe:27 Baha:19 Others: 25 Goias: 15 Others: 25 Espritu Santo: 27 Rio de Janeiro: 24 Sao Paulo: 12 Others: 25 Paran: 18 Others: 25 Biodiesel Percent 17
Northeast
17
Center-West
17 Minas Gerais, So Paulo: 18 Rio de Janeiro: 19 Others: 17
Southeast
South
Rio Grande do Sul: 12 Others: 17
Source: USDA, Economic Research Service using data from FAZENDA (2008).

Appendix table 2
Blending rates in Brazil for ethanol in gasoline content

Date Region Pernambuco So Paulo Alagoas Paran So Paulo So Paulo (metropolitan region) Rio de Janeiro, Cear RGN, Paraba, PE, AL, Mato Grosso Northeast Region Cear, Pernambuco, Alagoas Center, South, North, and Northeast Brazil Center, South, North, and Northeast Brazil Center, South Regions Brazil Brazil Brazil So Paulo (metropolitan region) So Paulo (metropolitan region) Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Blending rate (percent) 10 - 11 (Jul-Sep); 11 -15 (Oct-Dec) 11 - 12 11 - 15 10 - 15 (Jan-Jun); 10 - 12 (Jul-Dec) 11 - 13 (May-Sep); 18 - 20 (Oct-Dec) 18 - 20 10 - 12 18 - 20 20 - 23 23 - 25 20 15 12 20 20 22 18 (Mar-Aug); 13 (Sep-Dec) 22
1976
1977
1978
1981
1982 1984-88
1989-92
1990 1992-97 1998 2000 2001 2002 2003 2006 2007-09 2010 2011
22 22 - 24 24 20 22 20 - 25 (May); 25 (Jun-Dec) 20 (Jan-Apr); 25 (May-Dec) 20 (Feb-Mar); 23 (Nov-Dec) 25 (Jun-Nov) 20 18
Source: USDA, Economic Research Service using data from MAPA (2006).

Appendix table 3
Regulatory framework for the development of Brazils ethanol sector

Feb. 1931 Sep. 1931 Jun. 1933 Nov. 1941 Sep. 1942 Dec. 1965 Aug. 1967 Nov. 1975 May 1979 May 1981 May 1986 Apr. 1990 Feb. 1991 Feb .1992 Oct. 1993 Sep. 1995 Aug. 1996 Aug. 1997 Aug. 1997 Jun. 1998 May 1998 Jan. 1999 May 1999 May 1999 Dec. 2001 Apr. 2002 May 2003 May 2005 Jul. 2008 Apr. 2009 Decree 19,717 orders a 5-percent blending of ethanol in gasoline Decree 20,356 orders the development of the fuel ethanol engine Decree 22,789 creates the Sugar and Alcohol Institute (IAA) Decree-Law 3,855 regulates sugarcane labor contracting Decree-Law 4,722 declares the ethanol industry a national priority Law 4,870 regulates sugarcane and alcohol production Decree-Law 16 regulates alcohol production and trade Decree 76,593 creates the Proalcool program to reduce petrol dependency First alcohol car (FIAT 147); production goal of 1.5 billion liters ethanol attained Establishes sugarcane-ethanol co-generation procedures, economic impact Stagnation of Proalcool program; oil price stabilizes Law 8,029 eliminates the Sugar and Alcohol Institute (IAA) Law 8,176 creates a national fuels stock system Act No. 60 establishes sucrose-content based payments for sugarcane Law 8,723 mandates the fuel ethanol mix in gasoline Act 189 liberalizes sugar prices, except for cristal standard prices Decree 59,033 creates GERAN to establish the northeastern cane industry Law 7,478 regulates the national fuel systemcreates the National Energy Policy Council (CNPE) and the National Petroleum Agency (ANP) Creation of the Ministry Council for Sugar and Alcohol (CIMA) Decree 2,635 creates the Marketing Committee for Fuel Alcohol (CAEC) Creates CONSECANA, a payment system for the cane based on the TRS content and with ORPLANA and UNICA oversight Creation of BRASIL ALCOOL, 250 producers from the Southeast-South regions are required to remove 1.2 billion liters of alcohol from the market Creation of the Brazilian Alcohol Exchange (BBA) Ends Government intervention in sugar-ethanol markets; ends price controls Law 10,336 establishes the Intervention in the Economic Domain (CIDE) tax for gasoline and diesel, exempting ethanol Law 10,438 creates the National Renewable Energy Program (PROINFA) Introduction of ex-fuel vehicles, taxed at a lower rate than regular cars Kyoto Protocol favors use of ethanol in transportation. Decree 6514 enforces Brazils Forest Code ANP establishes the new designation of fuel alcohol as etanol at pumps
Source: USDA, Economic Research Service using descriptive information from MAPA (2006) and MME/EPE (2010b).


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A Report from the Economic Research Service

United States Department of Agriculture

BIO-02 June 2011

Brazils Ethanol Industry: Looking Forward

Approved by USDAs World Agricultural Outlook Board

3 Brazils Ethanol Industry: Looking Forward / BIO-02

Ethanol Feedstock, Industrial Processing, and Distribution

4 Brazils Ethanol Industry: Looking Forward / BIO-02

Brazilian States and regions

MARANHO (MA) PIAU (PI)

ACRE (AC) RONDNIA (RO) MATO GRO SSO (MT)

GOIS (GO) MINAS GERAIS (MG) SO PAULO (SP)

DISTRITO FEDERAL (DF) ESPRITO SANTO (ES)

Brazilian States and regions Center-West Northeast North Southeast South

MATO GRO SSO DO SUL (MS)

RIO DE JANEIRO (RJ)

PARAN (PR) SANTA CATARINA (SC) RIO GRANDE DO SUL (RS)

Cane area, yields, and production in Brazil, by region and State

3For a detailed description of the system, see Burnquist, 2001.

Ethanol Production Process

Sugarcane production by mills/distilleries and farmers

800 700 600 500 400 300 200 100 0 1990 92

7 Brazils Ethanol Industry: Looking Forward / BIO-02

Ethanol production process

Sold to the Power Grid Electricity Cogeneration (bioelectricity) Sugar Production

For the Mill

Bagasse(crushed cane stalk)

Cleaning and Crushing

Bagasse & Leaves

2nd Generation Processes Dehydratation Anhydrous Ethanol

Ethanol Plants and Regional Production

9 Brazils Ethanol Industry: Looking Forward / BIO-02

Sugarcane byproducts for ethanol production in Brazil

Ethanol Production Costs

Distribution of mills and distilleries, 2010

Brazils ethanol plants and ethanol production by State

Ethanol production costs in Brazil

12 Brazils Ethanol Industry: Looking Forward / BIO-02

Productivity of Brazilian ethanol and sugarcane

Tons of cane/ha 100 Liters of ethanol/Tons of cane 90 80 70 60

Ethanol Distribution and Transport Infrastructure

Regional ethanol and gasoline prices in Brazil

14 Brazils Ethanol Industry: Looking Forward / BIO-02

Average ethanol and gasoline prices in Brazil

Ethanol transportation infrastructure, 2010

Senador Canedo Terminal MG

Campo Grande Terminal SP PR So Sebastio Terminal Paranagu Terminal

Domestic Ethanol Consumption

Ethanol consumption in Brazil

Brazil's ethanol exports

1 ,439 1,338 1,013

18 Brazils Ethanol Industry: Looking Forward / BIO-02

Brazils ethanol exports by country of destination

19 Brazils Ethanol Industry: Looking Forward / BIO-02

20 Brazils Ethanol Industry: Looking Forward / BIO-02

The Contribution of Policies to the Development of Brazils Ethanol Sector

Policies in Support of Ethanol Feedstock

Subsidized credit allocations for sugarcane producers and mills

22 Brazils Ethanol Industry: Looking Forward / BIO-02

Policies in Support of Ethanol