Bloomberg Anywhere Remote Login Bloomberg Terminal Demo Request


Connecting decision makers to a dynamic network of information, people and ideas, Bloomberg quickly and accurately delivers business and financial information, news and insight around the world.


Financial Products

Enterprise Products


Customer Support

  • Americas

    +1 212 318 2000

  • Europe, Middle East, & Africa

    +44 20 7330 7500

  • Asia Pacific

    +65 6212 1000


Industry Products

Media Services

Follow Us

Brazil Crushing Sugar to Ethanol With Caps on Fuel Prices

Sugarcane Stalks Sit at a Plant in Brazil
Spending for new ethanol mills in Latin America’s biggest economy will shrink to $321 million this year, down from a peak of $7.6 billion in 2008, Bloomberg New Energy Finance estimates. Photographer: Paulo Fridman/Bloomberg

Decasa Acucar & Alcool SA employed 1,200 workers last year at a mill in Maraba Paulista, Brazil, that crushed cane to make sugar and ethanol. Today, all that’s left are 22 employees, a security guard and his dog.

The mill fell victim to inflation-control policies in Brazil, the world’s largest sugar maker and the top producer of ethanol made from cane. Government subsidies for gasoline reduced domestic demand for biofuels and compounded a global surplus of sweeteners. Decasa, which shut down its mill and agreed to sell all its sugar cane production to Odebrecht Agroindustrial, is seeking to pay off about 262 million reais ($112 million) in debt, court documents show.

“It’s sad,” Rubens Germano, a union leader for the mill’s workers, said in a telephone interview from Presidente Prudente, Brazil. “The place was full of people all the time, and now it’s a ghost house.”

President Dilma Rousseff caps gasoline prices through a controlling stake in state-run Petroleo Brasileiro SA to limit a 5.77 percent inflation rate that is the third-highest in Latin America. Only 24 percent of Brazil’s flex-fuel cars fill up with ethanol, down from 82 percent in 2009, said researcher Datagro Ltd. At the same time, sugar futures are heading for the longest slump in two decades. Since 2007, 51 mills closed, or 12 percent of the nation’s total, according to Itau Unibanco Holding SA, a Sao Paulo-based bank, and Unica, a trade group.

Yields Surge

Investors are fleeing. Yields on bonds issued by sugar and ethanol maker Grupo Virgolino de Oliveira SA surged 12.34 percentage points this year to 22.313 percent as of Dec. 17, compared with an average gain of 0.7 percentage point for high-yield emerging market corporate bonds. Yield gains for Aralco SA Acucar & Alcool bonds issued this year were almost 16 times more than the average increase for emerging market bonds, while Tonon Bioenergia SA was almost six times more.

Demand for ethanol fell 16 percent last year from a 2010 peak, according to data from Bloomberg Industries. Spending for new ethanol mills in Latin America’s biggest economy will shrink to $321 million this year, down from a peak of $7.6 billion in 2008, Bloomberg New Energy Finance estimates.

“It’s hard to see how these assets are going to be profitable,” Toby Cohen, a director at Czarnikow Group Ltd., which traded 2.4 million metric tons of raw sugar last year and had $3 billion of trading revenue, said by telephone from London on Dec. 4.

Doesn’t Pay

“When most of your production goes into ethanol and ethanol is not enabling you to service your borrowing as well as not paying you a return as a shareholder, that means you need a really high sugar price to be able to pay your borrowing, pay your taxes and make some money,” Cohen said. “The sugar price down here doesn’t do that.”

Subsidized gasoline helped cut demand for ethanol to 19.5 million cubic meters (5.146 billion gallons) last year from 23.2 million cubic meters in 2010, prompting mills to produce more sugar instead of the biofuel, according to data from Bloomberg Industries. That added to a glut of sugar as producers from Thailand to Australia boosted output after futures traded in New York climbed to a 30-year high of 36.08 cents a pound in February 2011. Since then, sugar prices are down 55 percent, including 17 percent this year to 16.15 cents a pound today on ICE Futures U.S.

Itau estimates that 44 of the 63 millers that are clients of the bank are losing money as measured by free cash flow, or what is left after capital spending, operating expenses and interest, Alexandre Figliolino, a director of agribusiness, said in a Dec. 5 interview.

Decasa’s Demise

Decasa’s mill halted sugar cane crushing indefinitely in November 2012, said Germano, the union official. The company’s creditors approved a bankruptcy recovery plan in April 2012, Jose Francisco Galindo Medina, an attorney for Decasa, said in a telephone interview from Presidente Bernardes.

The demise of the sugar industry is a setback for Brazil, which began its National Alcohol Program in 1975 to boost local ethanol production and reduce dependence on imported energy amid a global oil crisis, according to Unica’s website. By 1984, vehicles with engines powered by ethanol accounted for 94 percent of local production by major carmakers. The share declined to about 1 percent of the fleet by 2001 due to a supply crisis in 1989, Unica said.

Investment soared in the 2000s, as funding for new biofuel projects more than quadrupled from $1.7 billion in 2006 to the peak in 2008, Bloomberg New Energy Finance data showed. The flex-fuel car, which can run on pure ethanol or a mixture of the biofuel and gasoline, was introduced in 2003. As of September, 61 percent of Brazil’s light-vehicle fleet was flex-fuel, Unica estimates.

Ethanol Bet

“There was a very rapid process of investment, with 100 new mills being added between 2003 and 2009, which doubled Brazil’s processing capacity,” Elizabeth Farina, president of Unica, said in an interview at a conference in London on Nov. 26. “It was a bet on the ethanol market.”

Closings by unprofitable mills will have little impact on the amount of cane processed in Brazil, which has surplus capacity. More crops will be handled at modern plants with crushing costs at or below 10 reais a ton, said Plinio Nastari, the president of Barueri, Brazil-based Datagro, an industry consultant. Some shuttered units had costs as high as 18 reais a ton, he said in a Nov. 26 interview in London. The industry will emerge from the crisis stronger, because only the most efficient facilities will survive, Nastari said.

Millers Struggle

Millers started struggling as credit dried up during the global financial crisis and banks pulled money out of Brazil, according to Czarnikow’s Cohen. Foreign investors removed a record 24.6 billion reais from the Bovespa stock exchange in 2008, data on the bourse’s website shows.

At the same time, higher wages were boosting production costs, and a few years later, lower sugar prices reduced investment in cane fields, Unica’s Farina said. Harvests in the sugar-rich Center South region fell in the 2011-2012 season, the first drop in a decade, sparking ethanol shortages and forcing Rio de Janeiro-based Petrobras to import gasoline and sell it at a loss because of the government’s controls on domestic prices.

Petrobras has been selling imported gasoline below cost since 2010, as rising crude-oil prices and a weakening of the real boosted the cost of fuel imports. While Rousseff allowed a price increase of 4 percent last month, the first since March, the Petrobras statement on Nov. 29 announcing the change fell short of disclosing details of a methodology for future adjustments. Since then, Petrobras shares are down 14 percent, the worst performance on Brazil’s benchmark Bovespa index.

Gasoline Imports

“If you depend on a policy or somebody fixing a price, with the gasoline not allowing you to increase the ethanol price, it’s very difficult to plan expansion,” Eduardo Carmona, managing director at London-based trader ED&F Man Sugar Ltd., which has offices in Brazil, said in a Nov. 27 interview. “It’s key that the government moves toward less intervention and allows the market to move with fundamentals.”

Brazil imported a record 3.78 million cubic meters of gasoline in 2012 (23.8 million barrels), up 73 percent from the previous year, according to data from ANP, the country’s oil regulator. Consumption of ethanol, which grew every year from 2004 to the peak in 2010, declined last year to the lowest since 2008, according to Bloomberg Industries data.

Relative Cost

Ethanol is normally cheaper than gasoline at the pump because it burns faster, forcing drivers to fill up more often. The expense for consumers is about the same when the price of the biofuel is 70 percent of gasoline’s cost. While ethanol is currently below that threshold, the discount needs to fall below 60 percent to prompt a significant consumer switch, Nastari said. The biofuel was at 54 percent to 56 percent in 2009, when eight of every 10 cars in the flex-fuel fleet was powered by ethanol, he said.

Brazil is unlikely to increase gasoline prices further as Rousseff, 66, seeks re-election next year, according to Arnaldo Luiz Correa, a director at Sao Paulo-based Archer Consulting, further hurting profit for sugar mills. Producers also may be hurt by falling ethanol exports to North America, where the U.S. is scaling back biofuel mandates.

The U.S. Environmental Protection Agency is proposing to cut to 2.2 billion gallons (8.31 billion liters) the amount of so-called advanced biofuels, which include biodiesel and sugar cane ethanol, blended into fuels next year. That’s 41 percent less than foreseen in 2007. Most ethanol in the U.S. is made from corn, the nation’s biggest crop.

More Closures

Heavy debt obligations may force more mills to close in Brazil, Unica’s Farina said. Another 20 units may shut in the next two to three years, Nastari said. The Center South region has 353 mills, according to Czarnikow’s Cohen, who estimates Brazilian millers’ debt will probably increase to about 63 billion reais by the end of the season from 57 billion reais.

Bunge Ltd., a White Plains, New York-based agribusiness company that bought its first mill in 2007, hasn’t generated annual operating income at its sugar unit since at least 2009. Third-quarter losses at the division more than doubled to $19 million from a year earlier, and the company said on Oct. 24 it is considering a “full range of options” for its Brazil sugar unit.

Biosev SA, the Sao Paulo-based company controlled by Louis Dreyfus Holding BV, which bought the first of its 12 mills in 2000 to become the world’s second-largest sugar cane processor, posted net income of 80.4 million reais in the quarter to Sept. 30 following three quarterly losses, after selling assets and cutting costs.

Town Decimated

“The multinationals are surely very unhappy because they’ve invested a lot and returns are either negative or very low,” Figliolino said. “You will continue to see mills closing doors amid an investment drought.”

With the equivalent of 20 percent of the population of Maraba Paulista losing their jobs, when the Decasa mill ceased production, “some shops and little stores closed doors,” Germano, the Decasa union leader, said.

Danilo Cavalcanti dos Santos, a 27-year-old sugar cane picker who was laid off last year, said he’s still owed 12 months’ salary. “Gradually we started seeing rust on trucks, equipment not being replaced,” he said in a telephone interview from Presidente Venceslau, Brazil. “You could see that coming, but it’s still a surprise because you don’t want to believe it actually happened.”

Please upgrade your Browser

Your browser is out-of-date. Please download one of these excellent browsers:

Chrome, Firefox, Safari, Opera or Internet Explorer.