There is no doubt that Brazil jumped in first place in the biofuels race, thanks to the Ethanol Brazilian Program in the seventies and eighties (as a reaction to the oil crises of 1973 and 1979), and thanks of course to some dynamic entrepreneurs who decided to bet on the production of ethanol since then, and more recently of biodiesel. One legend (or true story?) is that biodiesel was invented in the seventies by a Brazilian, Prof. Expedito Parente of Ceara Federal University, but did not succeed then because the price of oil went up “only” up to 30 dollars in 1979. Some major ethanol producing companies are in Brazil – Cosan is the more famous example – and there are also some huge biodiesel companies such as Brasil Ecodiesel.
Our purpose here is very simple: to make a few comparisons between Brazil and the rest of the world, as far as biofuels are concerned. Really, Brazil seems to be blessed by God and Nature, as far as agro energetic raw materials are concerned, particularly of course sugar cane. But it is always useful to remember that other countries are also blessed, such as Malaysia and Indonesia. Even the United States are of course important players mainly because of soybeans and corn, but it is well-known by now that the major dilemma between food and fuels has to do exactly with the (heavily subsidized) attempt to use corn to produce ethanol – a clear economic policy mistake, which is additionally being protected by a crazy tariff, totally incompatible with the economics of fuels and biofuels nowadays, with oil at US$ 120 per barrel.
Sugar cane is really a “magic plantation” – and Brazil is much better situated in the production of ethanol from sugar cane than any other country. It is true that, even in the USA, sugarcane is produced in States such as Florida, Louisiana, Texas and Hawaii, but there are obvious geographical area limitations, even if the country decides to provide incentives for sugar producers to revert more quickly to ethanol in those four States. Furthermore, Central America and Caribbean countries are also sugarcane producers, including of course Cuba.
Although there is an intense program of research in Universities and companies in the USA in order to develop ethanol from cellulose at a reasonable cost, it is clear by now that it is impossible to compare the cost of ethanol produced from sugarcane with ethanol produced from corn and other raw agricultural materials.
Brazil has a major comparative advantage in the production of ethanol, and, even without reaching the forbidden areas of the Amazon, the amount of available agricultural arable land to increase production is enormous. It is difficult to understand the maintenance of the US tariff on ethanol imported from Brazil, except for political reasons. Consumers in the United States are being severely affected, particularly in areas such as the Southeast, where corn does not exist and the logistics to bring it from the center of the country is practically impossible.
With respect to biodiesel, there is no special comparative advantage in Brazil. Countries like United States can compete equally with soybean oil and Malaysia and Indonesia dominate the market for palm oil, with an impressive productivity, in addition to canola oil, which is prevalent in Canada and Europe. Naturally, there is a permanent search for non-food oils as raw materials for biodiesel such as castor oil and jatropha oil, which exist in Brazil, India and Africa, but in small scales.
With the existing price of oil, the permanent threat of war in the Middle East, the international geopolitics, and the environmental problems, there seems to be no other easy solution for the energy problem away from the liquid ethanol produced out of sugarcane. This is certainly the more important aspect of the Brazilian economy in our opinion for the next few years. The rest of the world will have to accept the reality of the liquid ethanol from sugarcane as the right and best solution for the oil crisis.
It is not necessary to believe in the peak oil theory (developed by chemical engineers, rather than economists); it is only necessary to look at the increasing demand from the non-oil BRICs (India and China) to understand that the very high price of oil is here to stay. With or without compulsory mixtures in gasoline and diesel, ethanol in particular and also biodiesel will be demanded in great scale. The United States will have to adopt the so-called E10 and E85 mixtures.
And the impressive thing about ethanol from sugarcane is that – in contrast to biodiesel derived from soybean oil – there is no cost pressure and no competition with food.
Moreover, even the dilemma between food and fuels may be considered somewhat fallacious, to the extent that the agricultural sector will respond to higher prices of corn, soybeans, palm, etc., by increasing supply. There will be enough soybeans for biodiesel and food – but in the case of corn it will never be able to compete with sugarcane for ethanol. And there will be in the future non-food vegetable oils for biodiesel such as castor oil and jatropha oil.
That is why the sugarcane economic situation does not even have to wait for this market adjustment between supply and demand of agricultural products for food and energy. Ethanol is already very cheap, when produced from sugar cane – much cheaper than gasoline at existing prices. Brazil is blessed, just like it happened last century with many countries in the Middle East, as well as Venezuela and Mexico, in the case of oil.
The major point we are trying to make for these agro energetic comparisons between Brazil and other countries, however, is somewhat similar to discussions from the past related to Brazilian agriculture in general. OK, yes, Brazil is blessed by Nature and God and it is highly competitive with sugarcane ethanol, but the country should not give chances to competitors. Remember the old “coffee country”: Brazilian ethanol will only become competitive and cheap with the right exchange rate. The world of floating exchange rates sometimes creates bubbles: there is no “natural rate” freely defined by the markets. This is the risk faced by a country blessed with sugarcane in practically all States.
From 1955 to 1985, Brazil had an amazing industrial growth and the exchange rate was fundamental for the process of import substitution (fifties) and export expansion (sixties and seventies). In the XXI Century, one should hope that the floating exchange rate does not destroy the new Brazilian agro energy growth perspectives.
We can be sure that the United States, Canada, Malaysia, Indonesia and African countries will also produce ethanol, biodiesel and even biokerozene. Normally, Brazil will be like Saudi Arabia is for oil – as far as ethanol is concerned -, but one cannot be sure when and if the Brazilian exchange rate will come back to normality in the near future.