The popularity of Brazil's ethanol industry seems to shift faster than the country's millions of flex-fuel car owners can accelerate. When ethanol prices closely track gas prices, ethanol producers are heroes in Brazil. When prices increase because of the lack of supply, drivers -- whose vehicles can run on ethanol, gas or any combination of the two -- want to know what happened to the promise of cheap, clean energy.
Last year was especially complicated for ethanol producers. A series of market factors exposed the sector's problems, from the productivity of sugar cane fields to the government's fuel policy. Pressured by high demand for sugar, producers made less ethanol in 2011, resulting in higher prices at the pump. Currently, Brazilian gas contains a mandatory addition of 20-25 percent biofuels.
Compounding the issue, officials in President Dilma Rouseff’s government decided to keep gas prices stable despite fluctuations in oil prices. This strategy protects Brazilians from inflation, but it also means that gas ends up being cheaper that ethanol, explains Andre Nassar, a consultant at the Icone Institute, a think tank specializing in the analysis of agricultural commodities. "The main issue is that there is not enough sugar cane," he says.
The sugar cane shortage couldn't have come at a worse time, especially since the U.S. market is finally set to open up. A few months ago, the Obama administration began to implement the Energy Independence and Security Act of 2007, a law signed by President George W. Bush. The law plans for US consumption of 36 billion gallons of ethanol by 2022, a tripling of the amount consumed today.
This was the moment Brazilian ethanol producers had been waiting 30 years for, the president of the Sugar Cane Industry Association (UNICA), Marco Jank, told The Economist magazine. The same article, however, highlighted the challenges the industry faces in overcoming technological barriers in order to increase the production of sugarcane.
A paralyzed giant?
Brazil is currently the second largest ethanol producer in the world after the United States. With 430 production units, most of which are concentrated in the region known as South Central, the production process of biofuel has created 1.2 million jobs and generates approximately $48 billion a year, according to industry reports.
Despite this strength, the industry was not immune to the economic crisis. The industry started to cool in 2009, when the economic crisis made access to credit more difficult. After years of a growth rate over 10 percent, sugarcane production fell to 550 million tons in 2011, leaving the sugar mills underutilized by about 150 million tons. Brazil went from being an ethanol exporter to being an ethanol importer (see chart below).
This does not mean that the industry stopped investing in innovation, says Alfred Swarcz, technology consultant for UNICA. He points to various programs that are doing research to create new varieties of sugar cane with a higher yield potential per hectare planted. "If technology stops, it dies. It always needs to be moving forward. There are numerous initiatives, but none of them are prepared to really address the need for more supply," he warns.
Many are hoping the so-called second-generation ethanol will provide a solution: it uses the sugarcane bagasse (the fibrous matter that remains after the stalks are crushed) and the stalk itself. Today these inputs are burned to generate energy or left on the field where the crop was harvested. Estimates are that production may start on a commercial scale in eight years, raising sugar cane productivity by 20 - 30 percent.
While Brazil awaits technological advances, Andre Nassar of the Icone Institute thinks its unlikely that the country will be able to meet all domestic and foreign demand for anhydrous alcohol, which is the kind used in gasoline mixtures. The turnover rate of sugar cane is less than in previous years, leading us to believe that there won’t be enough sugarcane to supply the millions of new cars that run on ethanol, again infuriating the consumers who were counting on cheap and clean fuel. "The industry will lose its market share. It may be able to recover it once it has increased production capacity, but it's still too early to tell," adds Nassar.
Gustavo Faleiros writes for Valor Economico and Folha de Sao Paulo and has been featured in Scientific American, the Guardian newspaper and the China Dialogue website. He has has a masters degree in Environment, Politics and Globalization by King´s College London.