South America Calling
Alastair Stewart South America Correspondent

Monday 06/16/14

Corn Ethanol and Brazil

In Brazil, ethanol is equated with sugarcane.

In Brazil, ethanol is made out of sugar cane. But increasing the use of corn as a fuel feedstock could be a wise move. (DTN photo by Alastair Stewart)

Travelling through the interior of Sao Paulo state, you see miles of densely packed lush cane fields and cane ethanol accounts for over a third of light vehicle fuel consumption.

But ethanol is also being produced from corn in Mato Grosso, Brazil's No. 1 grain state.

Two sugarcane ethanol plants in Mato Grosso now have capacity to process corn and will use 300,000 metric tons (11.8 million bushels) of the grain this year.

The other eight ethanol distilleries in the state also have plans to build corn processing capacity over the next two years, which could take demand for the grain to 1.5 million metric tons (59 million bushels), according to Glauber Silveira, corn ethanol commission coordinator at the Mato Grosso Soybean and Corn Association (APROSOJA).

A flourishing future for corn ethanol in Brazil is far from assured though.

CORN PRODUCTION GROWS QUICKLY

Brazilian corn production has grown dramatically in the last decade, particularly in Mato Grosso and surrounding states where planting a corn as a second crop after soybeans has become commonplace.

But the production of a low unit value crop such as corn exposes one of the main shortcomings of Mato Grosso farming -- its high logistics costs.

Long distances combined with insufficient transport and storage infrastructure causes freight costs to spike in the post-harvest period. Last July, the cost of transporting corn to port from Mato Grosso was higher than the price paid at the farm gate.

Given this state of affairs, the idea of processing corn into ethanol in the state is extremely appealing to the farm industry, helping boost local prices that currently enter into free fall in the immediate post-harvest period.

However, corn ethanol is not the panacea it may appear.

One major issue is the government's policy of holding down gasoline prices to control inflation, which has the effect of making ethanol less competitive.

In Mato Grosso, that means ethanol only accounts for 27% of light vehicle fuel consumption, down from around 60% ten years ago. If Brasilia stopped capping prices, consumption could easily return to previous levels, which would potentially translate into demand for 4 million to 5 million metric tons of corn, said Silveira.

But there are other problems.

One is the difficulty that independent distillers encounter in selling their ethanol. Many of the large cane ethanol producers have tie-ups with fuel distributors, which squeeze out smaller operations. This makes market entry difficult for cooperatives or grain companies looking to set up corn-only ethanol plants.

Another issue is energy. According to viability studies commissioned by APROSOJA, corn ethanol plants can make money in Mato Grosso. However, cane ethanol plants have an advantage in that they produce their own energy from sugarcane bagasse

While there is room for growth in demand inside Mato Grosso, the scope for sales to other states is limited. The states to the south and east -- Mato Grosso do Sul and Goias -- are big sugarcane producers, while the centers of consumption in the north and northeast are huge distances away.

Also, they don't say so in public but sugarcane industry leaders aren't happy with the idea that corn ethanol will grow. The industry fought hard for Brazilian cane ethanol to achieve advanced biofuel status in the U.S., opening the way for consistent exports north. They are worried the growth of corn ethanol could threaten that market.

In the short term, it makes sense for Mato Grosso cane ethanol plants to add corn processing capacity as it allows them to produce in the inter-harvest period between December and March -- cane has to be processed immediately after harvesting -- and means they take advantage of low post-harvest prices in Mato Grosso -- the price in Sorriso, northern Mato Grosso fell as low as 9.00 per bag ($1.70 per bushel) last year, or less than half that at Paranagua port.

But it remains unlikely a large portion of Brazilian corn production will be diverted to ethanol production in the future. The farm industry will have to improve logistics and increase animal protein production in the region to make planting corn more profitable.

Outside Mato Grosso, the opportunities are even more limited. Corn can't compete head-to-head with sugarcane, which has a higher energy content and the force of a major industry behind it, and the major producing areas are near Brazil's largest urban conurbations in the southeast and northeast. In the south, a big corn producing region, demand from the animal protein and export markets reduce the need for an alternative outlet for corn.

Brazil will produce 76.4 mmt in 2013-14, down 6% on the year before, according to Agroconsult, but the increased adoption of second-crop corn planting will mean corn production likely hits 100 mmt in the next five years.

(AG)

Posted at 2:34PM CDT 06/16/14 by Alastair Stewart
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