U.S. producers wonder how much Brazil can expand ethanol production and how much it could eventually export. The answer is that there is a long way to go before Brazil hits any physical limits to expansion. Exports might double in five years or less. In both aspects the question is whether it will be profitable for them to do so.
Take the output growth first. Available land is there. Brazil is bigger than the lower 48 U.S. states. However, at 110 million acres, its current cropland is less than half of ours. Potential cropland — without clearing rainforest — probably exceeds 300 million acres. Brazil thus has more room to expand crop acreages than we do.
Brazilians grow sugarcane on some 15 million acres. At the current split between ethanol and sugar, about eight million goes to ethanol. In the short run, doubling ethanol output would require shifting less than 10% of existing crop acres to cane.
Brazilian cane industry sources frequently cite over 100 million acres of new land potentially suited for cane production. This is in the Cerrados region of brush land running from west-central Brazil to the Northeast. However, most of this gets less rain than existing sugarcane areas of south-central Brazil. Yields would be lower, especially at first.
If land availability isn't the issue, how fast could Brazil ramp up production?
Increasing cane ethanol output is more complicated than for corn because cane acreage has to increase hand-in-hand with milling capacity. New U.S. ethanol plants, on the other hand, can draw existing corn production away from feed or exports.
A typical new cane mill grinds 1.65 million tons per year. It needs 70,000 acres of cane growing within 25 miles and roads that can handle 200 truckloads of cane a day over an eight-month harvest.
To get some idea of relative proportions, this size cane mill would grind the contents of a typical 20 × 60 ft. U.S. silo in a little over an hour. But it only turns out 55 million gallons of ethanol a year, half of what many new U.S. ethanol plants can produce.
Rapid cane expansion is possible but not easy. Production grew under 4% a year between 1990 and 2005, an era of generally unfavorable prices. A São Paulo cane industry association estimates national output could grow 35% by 2010. If that all goes into ethanol rather than sugar, output will rise by 5 billion gallons, doubling current production. That's 8% growth a year, an achievable goal based on Brazil's history.
Its soybean production has grown by 10% a year for 40 years. Current bean acreage of 55 million acres is nearly four times that of cane. Cane expansion is likely to follow the pattern of soybeans, taking some acres from other crops but with most expansion on land not previously cultivated.
Exports are a wild card. They depend on how much of any production increment gets shipped out of country. That in turn depends on three factors:
Oil prices — both globally and within Brazil.
Energy policies in the rest of the world including ethanol percentage mandates in Europe and Japan.
Relative exchange rates for the Brazilian real and the dollar.
As for U.S. corn ethanol, oil prices are crucial. Long-run world prices over $65/barrel would prolong the boom for Brazil's cane industry. However, physical limits to growing and grinding more cane would constrain growth, not economics. Ethanol available for export could top 2 billion gallons by 2010.
At world prices of $45-65/barrel, ethanol output would grow more slowly. Expansion onto soils with no history of cane growth would be gradual. Below $45, factors besides price would predominate.
In the long run, climate change may be more important to both cane and corn ethanol producers than dwindling oil supplies. Japan is contemplating a 3% ethanol mandate. The European Union already is phasing in a modest requirement. In both cases, meeting Kyoto requirements outweighs costly oil. Both would increase world demand for ethanol and Brazilian exports.
The U.S. dollar and the Brazilian real are both overvalued compared to what fundamentals will sustain over the longer run. The real is pricey because the tight money Brazil needs to hold down inflation causes the highest interest rates in the world. There is a lot of political pressure to cut those rates.
Rate cuts would also likely reduce Brazil's attractiveness to foreign investors. A real that was cheaper for industrialized nations would make Brazilian ethanol exports even more competitive — just as it would for Brazilian soybeans. The specific dollar-real rate would affect the attractiveness of Brazilian ethanol to groups in the U.S. that want cheap fuel regardless of source.
Brazilian ethanol output is going to grow. So will its exports. Just how much remains to be seen.
Guest columnist Edward Lotterman is an economist and writer in St. Paul, MN. He worked in Brazil for three years, and also taught ag economics at Peru's National Agricultural University. As an officer in the Army Reserve, he was a foreign area specialist for Brazil for many years. He recently traveled through key cane and soybean-growing areas in São Paulo and Goiás states. He has a BA in Latin American Studies and an MS in Agricultural Economics from the University of Minnesota, and was a regional economist at the Federal Reserve Bank of Minneapolis. His column, “Real World Economics,” appears twice weekly in the St. Paul Pioneer Press and the Idaho Statesman.