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The sugar-cane–ethanol nexus

GRAIN

The US and Brazil are, by far, the dominant centres of global ethanol production. Together they account for about 70 per cent of the ethanol currently produced in the world. Both of these countries also dominate the global export production of the crops from which they produce their ethanol. The US, which makes its ethanol out of maize, produces about 70 per cent of global maize exports. Brazil makes its ethanol from sugar cane, and today it accounts for over half of the raw sugar traded around the world. In these two countries, then, the supply of ethanol feedstocks occurs within global commodity chains, which are tightly controlled by a few transnational corporations and influenced by trade relations. [1]

Brazil’s emergence as a major sugar exporter began at the end of the 1980s when its sugar sector was liberalised. It was then that foreign investment started to flow in, expanding the scale and area of sugar production and orientHing the industry towards exports. But it was really only during the past few years that Brazilian sugar started flooding the global market. In 2004, Brazil won a key case at the World Trade Organisation against the EU sugar regime. Brazil’s victory undermined long-standing colonial trade and production routes, as well as the EU’s heavily subsidised export production. Today, sugar industries in Africa, the Caribbean, the Pacific and other parts of the world, which were sustained by preferential access to the EU, are in steep decline, even as the growing markets for ethanol raise the international price of sugar. Meanwhile, Brazilian sugar production is booming: the country’s share of global raw sugar exports surged from 7 per cent in 1994 to 62 per cent in 2006 and, over the past four years, its exports of sugar and ethanol increased by 243 per cent. [2]

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The Brazilian government plays a key role in facilitating this corporate consolidation. President Lula and his cabinet ministers are on a seemingly constant ethanol booster tour, striking deals around the world for the supply of Brazilian ethanol and technology. Much of the government’s support to the industry occurs via the state oil company, Petrobrás, which is actively developing the export infrastructure. Its latest project is a US$750-million ethanol pipeline, stretching 800 miles from Brazil’s interior to the Petrobrás refinery in Paulinia and then onward to the port of São Sebastião. The pipeline will have the capacity to transport nearly half of Brazil’s present ethanol production.

Petrobrás is also more directly involved in securing long-term export markets for Brazilian ethanol. In 2005, it entered into an agreement with Japan’s state oil company Nippon Alcohol Hanbai, to create Brazil–Japan Ethanol, a joint venture that plans to export 1.8 billion litres of ethanol per year to Japan. [4] In March 2007, as part of an US$8-billion partnership worked out between Japan and Brazil, Petrobrás, Mitsui and Itochu agreed to set up a Brazilian joint venture that would supply ethanol to Japan for at least the next 15 years. The two sides also began negotiations for the construction of a pipeline within Brazil to facilitate these exports. [5]

The big winners in Brazil’s emergence as the global sugar and ethanol powerhouse are the transnational corporations and the few families, known in Brazil as the sugar barons, who increasingly control the Brazilian sugar and ethanol industry. With foreign investors knocking on their doors, the sugar barons have been consolidating their holdings and restructuring their companies in order to attract foreign investment. Some have even put their family businesses on to the Brazilian stock exchange. Typically, what happens is that foreign investors buy up controlling interests or minority stakes, leaving the sugar barons, with their expertise in maximising productivity by exploitation, to oversee the agricultural operations.

Brazil’s sugar barons have used this flood of finance, from foreign investors and the government, to take over smaller firms and expand production for export. Between 2000 and 2005, 37 mergers and acquisitions took place within the country’s sugar and ethanol industry. [6] Today it is possible to discern just a few conglomerates – transnational networks of TNCs and sugar families – that control the industry. Two of the most important are the Crystalsev and the Ometto conglomerates.

Brazil is attracting more international investments in agrofuels than any other country. In 2006 alone, over US$9 billion were invested in the Brazilian ethanol industry, with US$2 billion going into the construction of new ethanol plants. [7] A number of multi-million dollar investment funds have recently been set up on foreign stock exchanges with the specific objective of investing in Brazilian ethanol (see table 5 on page 23). The new money is pushing sugar production into new areas, particularly on to lands that have long been used for cattle pasture. Eduardo Pereira de Carvalho, the President of São Paulo’s Sugar-Cane Manufacturers’ Union, predicts that as much as a third of Brazil’s current pasture land will be converted to sugar-cane production in the near future. “Over the next 15 years, an extra 100 million hectares could be planted with cane, primarily on pasture land”, he said. [8]

The expansion of Brazilian sugar and ethanol has repercussions beyond Brazil’s borders. The glut of money is spilling over into neighbouring countries, which offer even lower costs of production and/or strategic trade access to the US market. The Brazilian government recently signed a US$100-million agreement with its Ecuadorian counterpart to set up two ethanol plants in Ecuador and to introduce high-yielding varieties of Brazilian sugar cane. Ecuador has two advantages to offer foreign investors: the 10,000-tonnes-per-year quota it has for the US market; and the unlimited access it has been given to the EU market as part of a diversification programme to encourage farmers to move away from away from illegal crops such as coca. Similar deals have been forged with Caribbean countries that have trade access to the US through the Caribbean Basin Initiative (CBI). [9] The Brazilian trading group Coimex has a joint venture in Jamaica with Petrojam to invest US$7.3 million in the rehabilitation of a 40-million-gallon ethanol production plant that will import all of its raw material from Brazil and ship all of its output to the US ethanol market.

Jamaica is one of a number of small countries whose sugar sectors are in danger of completely collapsing when the EU Sugar Protocol begins to be phased out in 2007. And, like Jamaica, most of these countries are in a process of deep restructuring that they are carrying out with EU support. In these processes, ethanol is often proposed as a way to salvage part of the industry, but typically alongside privatisation plans that put the ethanol production and trade into the hands of foreign corporations.

Mauritius, for instance, which is the largest supplier of sugar to the EU, holding 38 per cent of the quota within the Sugar Protocol, is negotiating an assistance package with the EU to restructure its sugar industry. As it stands, the EU will provide over 300 million euros towards the formation of a sugar-cane “cluster” in the country that will essentially centralise, mechanise and consolidate the country’s small-scale sugar production and reorient it towards energy production, primarily ethanol. [10] Much is made of how the cluster will serve local energy needs, but already the bulk of the island’s ethanol is exported to Europe. The ethanol business in Mauritius is controlled by Alcodis, a joint venture company that is part of the Belgian shipping conglomerate AlcoGroup. The group handles about 8 per cent of the ethanol traded in the world, most of its sourced from its Brazilian operations but some also coming from both its subsidiary in South Africa, NCP Alcohols, and its plant in Mauritius. In 2004 Alcodis shipped over 3.5 million litres of ethanol to the EU from Mauritius – tax-free because of its status as an ACP (African, Caribbean or Pacific) country. [11]

Table 5. Investment funds for Brazilian ethanol

Infinity Bioenergy	Bermuda-based company listed on London Stock Exchange that was formed by about 50 investors in 2006. One of its principle investors is the American fund Kidd & Company. With over US$500 million slotted for investments in Brazilian ethanol, the fund has so far spent US$400 million purchasing controlling interests in three plants with a joint milling capacity of 3.5 million tons of sugar cane, and is investing in the construction of two new plants in the states of Espírito Santo and Bahia. Infinity BioEnergy’s focus is on regions with little tradition in sugar cane, where it sees the potential for growth. Infinity BioEnergy also recently announced that it was merging with the Evergreen fund, another British investment fund targeting Brazilian ethanol with a majority interest in the Alacana ethanol plant in Nanuque. Infinity plans to export at least part of this production to the US, and is therefore investing US$20 million in a dehydration plant in the Caribbean that will provide duty-free access to the US market
Bioenergy Development Fund	Launched in early 2007 by France’s third-largest bank, Société Générale, it is incorporated in the Cayman Islands. Although it has yet to make an investment, the fund raised US$200 million in its first month and, supposedly, is on track to raise a total of US$1 billion this year. Société Générale is also involved in investments in US ethanol plants.
Brazilian Renewable Energy Company Ltd (Brenco)	Raised US$200 million in the initial private placement of its shares. It is financed by several big-name investors, such as Sun Microsystems founder Vinod Khosla, supermarket magnate Ron Burkle and the co-founder of AOL, Steve Case. Goldman Sachs is its exclusive placement agent. Other investors include former World Bank President James Wolfensohn, film producer Steven Bing, and Brazilian firms Tarpon All Equities and Grupo Semc. The CEO of Brenco is Philippe Reichstul, former president of Petrobrás. Brenco’s goal over the next 10 years is to reach an annual output of 3.8 billion litres, according to market sources. Brenco is incorporated in Bermuda, but has headquarters in São Paulo.
Clean Energy Brazil	Established by Numis, an English investment bank. Partners include Czarnikow Sugar, one of the world’s largest sugar brokers and the broker for approximately 30% of the Brazilian sugar/ethanol market, and Agrop, owned by Brazil’s Junqueira sugar family. The fund operates on the London Stock Exchange, and raised US$185 million in its initial public offering. Its first acquisition in 2007 was of a 49% stake of the Usaciga sugar group.

Latin America’s regional bank, the Inter-American Development Bank (IDB), is another major player shaping and supporting the unfolding ethanol agribusiness web. It works closely with the Interamerican Ethanol Commission to develop the global market for ethanol, through a twin strategy of expanding ethanol production and consumption. IDB President, Luis Alberto Moreno, is one of the chairs of the commission, along with former Florida Governor Jeb Bush and former Brazilian Minister of Agriculture Roberto Rodrigues, who is now president of the Superior Council of Agribusiness of the São Paulo State Federation of Industries.