Impact Brazilian Biofuel Technology, Policy and Land Expansion on Brazilian Ethanol

Industry and Food Prices

DANIELLE TORRES (1), CARL PRAY (2), YANG JUN (3) and GERALDO MARTHA, (1),

EMBRAPA, BRAZIL (1); RUTGERS UNIVERSITY, USA (2); CENTER FOR CHINESE AGRICULTURAL POLICY, CHINA

Corresponding author: danielle.torres@embrapa.br

2

Brazil – The Biofuel Success Story

• Ethanol as a biofuel has been an important economic and environmental success

• However, recently growth has slowed • This research uses a modified global trade model – GTAP -

simulation model to look at the potential for future increases in sugarcane ethanol production from – Improvements in technologies – Changes in Brazilian price policies– Global increases in oil prices

• It also uses the model to look at the impacts of these changes on Brazilian and global food prices

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But Recently Ethanol Production Has Slowed

Note: 2011 is an estimate

Source: US Energy Information Administration

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Summary of Important Results

• Technology growth can increase production rapidly only if it is coupled with growing oil prices – It would be particularly important in preventing sugar production to

decline and prices to grow further

• A resurgence of the ethanol will require two things– A major increase in the global price of oil AND– Brazilian government policy that does not keep the price of ethanol low

• Increasing cultivated land in response to high oil prices can have a impact on ethanol similar to the growth productivity, but has a major advantage over technology in that it would reduce the prices of other food in Brazil and globally.

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Policies – Proálcool 1975 – 2000

• 1976 the government made it mandatory to blend anhydrous ethanol with gasoline, fluctuating between 5% to 22%. which required just a minor adjustment on regular gasoline motors.

• Petrobras (govt oil company) buys all ethanol at fixed price• Prices, subsidies, and tax incentives

– Subsidized credit is available to farms for expansion and to sugarmills to build ethanol plants

– 1979-85 government subsidized the production of 100% hydrated ethanol fuel vehicles

– Gasoline has been taxed and the money is used to subsidize the price of hydrous ethanol

– Registration tax for 100% ethanol fuels is much less

• Government forces gas stations to change premium pumps into ethanol pumps ( military regime forced, would not be possible today)

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Policies 2000 to present• Liberalization of ethanol markets starting in 1999

– Petrobras fixes price of oil to producers and markets sort out prices of ethanol and biofuel based on cost of production and mileage that cars get – 100% ethanol gives about 65 to 75% of mileage of gasoline …

– Brazilian gasoline taxes are around 54% while ethanol fuel taxes are lower and vary between 12% to 30%, depending of the state

• Mandates – In 2003 these blend mandates were set at a minimum of 20% and a

maximum of 25%.– Since July 1, 2007 the mandatory blend is 25% of anhydrous ethanol and

75% gasoline

• Other policies– Environmental policies like commitment to stop burning sugarcane– Policies to encourage ;production and sale of electricity to Brazilian grid– Tariffs to protect local industry until 2002 (??)– Petrobras investments in pipelines

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Impact of Government/Petrobras Price Policies

Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-110.20.40.60.8

11.21.41.61.8

2 Gasoline Prices

BR Gasoline A US Gulf

R$/

lite

r

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Most sugarcane production increases from land expansion: 2 to 8 mil ha. Yield 50 to 80 ton/ha.

Fed. Government has implemented regulations that..

1.Prohibit:

• Sugarcane plantation in sensitive biomes such as the Amazon forest and Pantanal wetlands.

• Sugarcane cultivation on native vegetation

2.Allows:

• 64.7 million hectares for sugarcane expansion; equivalent to 7.5% of the Brazilian territory (currently 0.9% of the area is used for sugarcane)

Land is Still Available:Sugarcane Zoning in Brazil

Sources: Embrapa ,Ministry of Agriculture, Livestock and Food Supply.

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Three different types of technologies played an important role 1. Research by public and private sector institutions increased the yield of cane - tons of sugarcane per ha and sucrose per ton of sugarcane.

2. Research, learning by doing, and economies of scale by the ethanol industry increased the efficiency of converting sucrose into ethanol

3. Research by public and private organizations developed engines which could run on pure ethanol in late 1970s and any blend of ethanol and gasoline (flex vehicles) in late 1990s.

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Brazilian Sugarcane Production Costs Decline

Source: van den Wall Bake at al (2009)

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Ethanol Production Costs Decline

Source: van den Wall Bake at al (2009)

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New Technology Increased Demand for Biofuel

• 100% alcohol vehicles - Fiat produced the first 100% alcohol vehicle in about 1980. Technology developed by scientist at Brazilian Aerospace Institute

• Flex fuel vehicles - Magneti Marelli (auto parts makers owned by Fiat) –R&D $10 million over 3 years in late 1990s in Brazil

• Ford, Volkswagen and Fiat also did research in Brazil to develop flex vehicles…..

• Nowadays almost all major car companies

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Historical Trends in Alcohol & Flex Vehicles Sales

• Data from ANFAVEA

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Future of Brazilian Biofuel Industry?• Major factors are price of oil, price of sugar, & export markets

– Very important: access to US market• Land is still available and major investments being made in ethanol facilities

– for sugarcane – 10 times current area is designated by government as land which could be used without hurting the environment

– Biodiesel – oil palm, soybeans???, fat • Technology for reducing costs, GHG and biodiversity impacts

– Increased efficiency of current technology • Sugarcane production efficiency• Ethanol efficiency • More bioproducts like electricity from burning bagasse

– Second generation technology - bagasse to ethanol – Sucrose and bagasse to diesel, gasoline and green chemicals…

• Policy – likely to remain supportive of biofuels – Trying to build new export markets for ethanol– However current price controls on gasoline are reducing demand for biofuel

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Model description

• The model used for the simulations is a modified version of GTAP-6, which is extended to allow energy capital substitution relationship as in the GTAP-E (energy) model by Burniaux and Truong (2002).

• The GTAP 6 model contains 57 sectors, among them 20 represent agricultural and processed food sector.

Our model includes features such as:- the possibility of substitution between biofuels and fossil fuels; - an introduction of four new industrial sectors: sugar ethanol,

maize ethanol, soybean diesel and rapeseed diesel

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Baseline and scenarios

• Ethanol production: 8% annual growth from 2006 to 2020– Baseline (Historical growth rate) :

• sugarcane yield growth rate = 1.04% per year • Other crop yields historical average growth• No change in conversion technology• Low elasticity of substitution• Prices at $60/gallon • Cultivated land fixed

– Alterative Technology Scenarios: • sugarcane yield growth rate =0.52% or 2%• efficiency of conversion process improves by 10% by 2020• Flexfuel vehicles adopted increasing elasticity of substitution

– Alternative land policy - Land allowed to grow rapidly 1.65% annually– Alterative Price Scenarios – world oil price doubles – Alterative Brazil Policy scenarios with high oil prices

• Brazil keeps internal oil prices low– Stays at $60/gallon – Up to $90/gallon – Equals world price….

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Table 1: Brazil's production and trade of ethanol and sugar in 2006 and 2020 in reference scenario

　 Units 2006a 2020b

Percentage change during 2006-2020in reference scenario

Ethanol

Production Million gallon 4491.4 4491.40.0

Export Million gallon 399.4 360.2 -9.8

Import Million gallon 1.6 1.9 14.7

Sugar

Production Million tons 32.2 49.152.6

Export Million tons 19.4 30.154.9

Import Million tons 0.0 0.036.9

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Impact of technology

• Sugarcane yields – – Average yields considerably below highest yields by farmers and far

below the yields on experiments so there is considerable potential– potential biomass per ha continues to grow but at the expense of

sucrose per ton and biotech has not been much help so far…– Major investments breeding in the last 4 years by government and

private sector.– Scenarios with historic growth – 1% annually and pessimistic (.5%) and

optimistic (2%)

• Conversion technology (sugarcane to ethanol) – productivity will increase by 10% from 2006 to 2020

• Technology growth can increase production rapidly only if it is coupled with growing oil prices – It would be particularly important in preventing sugar production to

decline and prices to grow further

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Brazilian technology impact on ethanol/sugar sector important but limited….

　 　 Low Prices Low Elasticity 

   Low sugarcane yield growth 1

High Sugarcane yield growth 2

High conversion ratio 3

High yield, High conversion 9

High land growth 8

Sugarcane Output -5.4 10.0 0.9 10.7 8.5

Price 5.8 -9.5 0.6 -9.2 -8.4

Sugar Output -2.8 5.0 -0.4 4.7 2.9

Price 1.5 -2.4 0.2 -2.2 -1.4

Ethanol Output -7.0 13.1 11.6 25.5 10.9

Price 2.7 -4.5 -4.0 -8.2 -3.3

Export -8.8 16.7 14.9 33.0 11.8

　 Import -1.5 2.5 2.1 4.5 4.0

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Impact of Tech on Food Prices in Brazil and World

Low Prices Low Elasticity

Low sugar-cane yield

growth

High Sugar-cane yield

growth

High conver-sion ratio

High yield, High conversion

High land growth

BRAZIL Crop excluding sugar 0.0 0.1 0.1 0.1 -6.2 All crops 0.5 -0.9 0.15 -0.8 -6.5 All animal -0.1 0.1 0.1 0.2 -0.1 WORLD All crops 0.0 -0.1 0.0 0.0 -0.7 All animal 0.0 0.0 0.0 0.0 -0.2

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Technology plus high oil prices gives the ethanol growth that government is looking for

　 　 High Prices High Elasticity

   No land or productivity

change 7Cultivated Land

Increases 10Productivity and land

increase 13

Sugarcane Output 66.2 92.6 120.1

Price 64.0 50.2 41.6

Sugar Output -18.0 -14.9 -12.5

Price 15.6 13.5 12.0

Ethanol Output 105.2 142.8 212.3

Price 39.6 34.7 25.8

Export 234.1 279.8 379.2

　 Import 154.1 182.5 216.3

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High Oil Price combined with land growth can mitigate the impact on Brazilian and world food prices

High Prices High Elasticity

No land or

produc-tivity

change

Cultivated Land

Increases

Productivity and land increase

BRAZIL Crop excluding sugar 13.2 6.7 7.5 All crops 19.9 12.6 12.7 All animal 5.2 5.8 6.4 WORLD All crops 7.4 6.7 6.7 All animal 2.4 2.3 2.3

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But government price policies – coupled with changes in substitution elasticity – impact on ethanol/sugar

Low Prices ($60/barrel)

High Global Oil Prices ($120/barrel) High Elasticity, and 2006 Technology

Brazil Oil Price = Global,

High Elasticity

Brazil Oil Price = Global,

Brazil Oil Price

$60/barrel,

Brazil Oil Price

$90/barrel,

Sugarcane Output -2.4 66.2 24.0 49.8

Price -1.5 64.0 23.6 45.7

Sugar Output 1.0 -18.0 -3.0 -11.6

Price -0.4 15.6 5.9 11.2

Ethanol Output -3.8 105.2 36.3 77.9

Price -1.1 39.6 14.6 28.5

Export 20.0 234.1 181.9 218.1

Import -9.3 154.1 46.0 116.2

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Price policies – coupled with changes in substitution elasticity – impact on food prices

　Low Prices ($60/barrel)

High Global Oil Prices ($120/barrel)

 

Brazil Oil Price = Global,

High Elasticity  

 

Brazil Oil Price = Global,

High Elasticity

Brazil Oil Price

$60/barrel, High

Elasticity

Brazil Oil Price $90/barrel, High Elasticity

 

BRAZIL          

Crop excluding sugar -0.1   13.2 9.7 11.7

All crops -0.2   19.8 11.1 15.7

All animal 0.0   5.2 4.0 4.7

WORLD          

Crop excluding sugar0.0

 2.2 2.1 2.2

All crops 0.0   7.4 6.8 7.2All animal 0.0   2.4 2.3 2.3

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Summary of Important Results

• Technology growth can increase production rapidly only if it is coupled with growing oil prices – It would be particularly important in preventing sugar production to

decline and prices to grow further

• A resurgence of the ethanol will require two things– A major increase in the global price of oil AND– Brazilian government policy that does not keep the price of ethanol low

• Increasing cultivated land in response to high oil prices can have a impact on ethanol similar to the growth productivity, but has a major advantage over technology in that it would reduce the prices of other food in Brazil and globally.