Honey trap in the making?

by Dave

ET-Features-The Economic Times

First, Brazil’s cane area is expanding. It has sown 8 mn ha for the 2008-09 season, up 12%. (This is almost double India’s acreage this year.) Brazil will also harvest 12% more cane than last year. Even so, Brazil’s cane farms add up to just 2% of its total farm land. So they are still not under any assault from food-vs-fuel activists and have plenty of room to grow. Supply of cane is plentiful this year.

Two, mills are growing in number and size. Thirty new mills should start operations this season apart from expansions by older mills. That means increased competitive pressure.

Foreign investment and interest in Brazilian sugar sector has never been higher. Mills controlled by foreign investors crushed 11.5% of all sugarcane crushed in Brazil last year. MNCs now control 10% of Brazil’s ethanol production and growing.


Three,
meanwhile all mills are coping with rising cost of growing, harvesting and
processing cane. It now costs 11% more to plant cane. The average cost per cut
has increased 30% due to the sharp increase in the cost of inputs such as
fertilisers.

Four, while ethanol
and power are two significant revenue streams, they are no match for sugar.
Speaking at Stanford last November, Cosan CFO Paulo Diniz broke down
Cosan’s $1.7 bn in revenue: 61% from sugar sales, 33% from ethanol sales,
and 6% from cogen power sales. That proportion is fairly typical. So don’t
believe anyone who says Brazilians have gone off
sugar.

Five, Brazil plans to
increase ethanol exports 25% to almost 5 billion litres. Of this, over 3 billion
litres could potentially be exported to the US, either directly or through the
Caribbean Basin Initiative. That sounds like a great profit opportunity. But
Brazil’s competitiveness in the US after paying a 55 cents-per-gallon
import duty depends on local corn
prices.

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