Brazilian Ethanol

1
Brazilian Ethanol

• Marina Mendes Tavares
• mmtecon.googlepages.com/ Guest_Lecture

2
Introduction

• Brazilian experience with Ethanol Program
  (Pro-Alcool).
• Ethanol in the USA.
• Main consequence of the USA Ethanol program in
  the price of food.

3
Brazil

• Brazil is a democracy.
• Brazil is 5th largest country in the world (with
  8,511,965 sq km, about 400,000 sq km bigger than
  USA without Alaska).
• Brazil is 5th most populous country in the world
  (about 196 million).
• Brazil is 10th country in GDP per capita (about
  9,700 per head).
• Brazil GDP is 1,835,642 millions of dollars in
  2007.
• US GDP is 14,712,369 millions of dollars in 2007.

4
Oil Prices in the World Market
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Ethanol Brazil

• Ethanol in Brazil is made from sugar-cane (which
  is the major source of sugar as well).
• Brazils National Alcohol Program, PROALCOOL, was
  launched on November 14th,1975 (decree Nº
  76.593).
• Main objective give incentives for ethanol
  production.

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ProAlcool Objectives

• 1973 - OPEC oil embargo and production cutback
  had raised concerns that oil dependency could
  endanger national security.
• At the time, Brazil was importing 80 percent of
  its oil.
• Two main goals for this program
• energy security (reduce dependence on imported
  oil, motivated by 1973 OPEC oil embargo)
• agricultural price support (sugar prices were
  record low at the time).

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ProAlcool 1st phase

• Mandated mix of Gasoline with Ethanol
• - Mix in proportion of up to 24.
• Increase the number of refineries
• 2 billions of government investment in the form
  of loans with low interest rate.
• PETROBRAS responsible for distribution and also
  keeping gasoline prices artificially higher.
• Such involvement from PETROBRAS represented 4
  billions in losses.

Marina Mendes Tavares
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Effects of Program Sugar, Ethanol and Sugarcane
production.
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ProAlcool 2nd phase

• After the second shock on oil prices (1979-1980),
  oil imports in 1980 represented 45 of Brazilian
  foreign exchange.
• Main incentives to the program were
• Tax reduction to buy ethanol cars.
• Guarantee the demanded for ethanol cars, from
  government companies.
• Low interest rates in loans for agro-industrial
  ethanol firms.
• Guarantee that the price of alcohol sold was 59
  of gas price, (price ceiling).

Marina Mendes Tavares
10
ProAlcool 2nd phase cars

• In 1980 the first popular E100 car is
  manufactured Fiat 147.
• In the end of 80s, 90 of the new cars sold in
  Brazil were pure ethanol.

Marina Mendes Tavares
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Effects of Program car production in Brazil.
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Pro-Alcool Crisis

• Pro-Alcool was successful during the beginning of
  80s. But not without its problems.
• A change in external factors has caused a
  shortage in ethanol supply.
• The main factors of the ethanol crisis were
• Decrease in the price of petroleum.
• Increase in the price of sugar.
• Lack of government resources to sustain
  pro-alcool.
• Increase in the demand for ethanol.

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Ethanol 1989 shortage explained
P
Supply of Ethanol
Demand of Ethanol
P. Ethanol 84 59 of P. Gas

P. Ethanol 89 59 of P. Gas
Q
QS
Shortage

• All of a sudden, Ethanol might loose
• all its advantages over gasoline, says
  Augusto Garrido. Owner of a fleet of 10 cars
  running on Ethanol that are now for sale, soon to
  be replaced by gasoline running cars.

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Sugar Price in the World Market
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Ethanol Crisis

• As a consequence of the shortage
• Demand for ethanol cars decreased, (lack of
  credibility in program).
• Decrease in the production of ethanol cars
  (substitute goods)
• Automobilist Industry preferred to produce
  gasoline cars that were consumed in all world.

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Ethanol Currently

• During the 90s government provided incentives to
  the use of ethanol in Public Transportation.
• In 2003 Volkswagen build the first flexfuel
  vehicle Gol 1.6 Total Flex. Followed by
  Chevrolet Corsa 1.8.
• Nowadays you can buy flexfuel vehicles for any of
  the major car manufacturers.
• There around 40 different models.

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Ethanol Currently

• Gas in Brazil contain 24 of ethanol.
• Flex Cars can run with any ratio of ethanol and
  gas.
• Natural Gas is also popular in Brazil.
• Many Taxi drivers
• have tri-fuels cars that
• can run with gas, ethanol
• or Natural Gas.

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Ipanema

• This is the IPANEMA, made by EMBRAER.
• Agricultural aircrafts used in aerial dusting
  (pulverization).
• First fixed-wing running
• on ethanol.
• This airplane has 80
• market share in Brazil.

Marina Mendes Tavares
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Ethanol Characteristics

• Lower energy content of ethanol fuel, full flex
  vehicles get less miles per gallon.
• Ethanol price must be between 25-30 of gasoline
  to break even.
• Ethanol more competitive in Sao Paulo than in Rio
  de Janeiro.

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Main Lesson of Brazilian Ethanol

• Pro-Alcool was unsuccessful in the first part,
  because there was too much government
  intervention.
• Highly susceptible to market forces (government
  subsidy not justified).
• Pro-Alcool now is more successful, there is no
  government intervention, no subsidies.
• With high price of Petroleum, ethanol is more
  competitive.
• Advances in technology have decreased costs of
  production (there is still room for improvement).

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II part Ethanol in the USA
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Brazilian experience with Ethanol and USA
experience with Ethanol.

• Quote from ETHANOL FACT BOOK
• Brazil is a shining example of how a commitment
  by government can help achieve goals for ethanol
  production and use. In 1975, Brazil began an
  ambitious, three-stage, national alcohol fuel
  program designed to reduce its dependence on
  imported oil. Today, this program has been hailed
  as a valuable success.

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Ethanol USA

• Ethanol in the US is produced from corn.
• Like in Brazil in the past, subsidies are
  provided.
• Sugar cane ethanol packs 8.2 times as much energy
  as used to produced.
• Corn ethanol just packs 1.5.
• Brazilian distillers can produce ethanol for 22
  cents a liters, corn based ethanol can produce to
  30 cents.

Marina Mendes Tavares
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Ethanol - USA

• MBTE was polluting ground water. So the solution,
  shift to the use of ethanol as an additive.
• Now, gas in US contain in general 5.6 of
  ethanol.
• Nearly half of U.S. gasoline now contains up to
  10 ethanol (E10).
• You are not allow to use more than 10 of ethanol
  in standard cars.

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Ethanol - USA

• In Minnesota E10 is mandatory.
• E85 are cars that can run with at most 85 of
  ethanol.
• There are 6.8 million of E85 cars in the US.

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E85 Gas Stations
Source US Department of Energy
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Ethanol - USA

• Currently USA is the major producer of Ethanol,
• Nearly 10 billion gallons of annual operating
  capacity is projected to be on line by 2008.
• Current situation (ethanol market)
• i) import tariff is 54 cents
• ii) subsidy is 51 cents per gallon

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US Ethanol Production
Marina Mendes Tavares
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Biofuels

• Reason for increased Demand for biofuels
• i) Increase in the price of the substitute
  (gas)
• ii) Change in preference (increase in the
  concern about environment issues).
• So the equilibrium quantity increases.

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Implications of Biofuels

• What do you expect to happen with the price of
  food?
• Increase in the price of livestock, since corn is
  used to feed animals.
• Increase in the price of other crops, since there
  will be substitution in the field.
• Increased correlation of corn price and ethanol
  prices.

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Example of correlation across markets Price of
Corn and Soybeans.
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World Market Share of Corn.
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Distribution of Corn Production in the US
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The End of Cheap Food?

• Increase in the price of commodities foods.
• Increase in the price of fertilizes that their
  main resource is oil.
• Increase in the demand for food from emerging
  economies, (China and India).

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Government Responses

• Exporting Countries - exporting restrictions.
• Importing Countries
• i) Price Control
• ii) Food Subsidy
• iii) Cheap Credit

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Examples

• China - Price control in milk, bread, eggs and
  noodles.
• Increase tariff on many exported grains and
  banned rice exports.
• Russia Price control on some basic foods.
• 40 export tariff on wheat.
• EU suspended import duties on all grain except
  oat.
• India banned the exports of all rice and cut
  tariff in oil corn and wheat.
• Argentine export tariffs.

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Conclusion

• Ethanol produced from foodstuff provides positive
  pressure on food commodities prices.
• Market intervention by Governments sometimes are
  necessary but certainly are highly controversial.