Brazil's Ethanol Industry Struggles to Meet Rising Demand

Rising prices worry Brazilian President Dilma Rousseff. When she took over in January, she inherited an economy performing so well that economists had begun to fret about overheating and inflation. Complicating matters, Brazil’s currency, the real, continues to rise relative to the U.S. dollar and the Chinese yuan, undermining the competitiveness of Brazil’s manufactured goods on the world market. Now, Rousseff can add another problem to her list—rising fuel prices stemming from falling sugar production and increased demand.

Brazil has become known internationally for becoming a production powerhouse of sugar-based ethanol. Because Brazil has never produced enough gas to supply its domestic market, the government turned to ethanol as an alternative in 1975. At a time when Brazil was importing some 90 percent of its fuel in the form of foreign oil, the military dictatorship began the national ethanol program. Today, Brazil is the second-largest producer of ethanol in the world, after the United States. 

Three factors have come together in recent months to hit Brazilian fuel consumers. First, Brazil’s surging economy and expanding middle class translate into increased car sales and greater demand for fuel. Brazilian consumers bought more than 3.5 million cars and trucks last year, according to The Los Angeles Times. The figure marked an 86 percent jump compared to 2006. Second, poor sugarcane harvests over the last two years have dented the ethanol industry’s growth. While ethanol production grew 3 percent last year to 25.3 billion liters, that growth did not keep pace with demand. Depending on the type of car they own, Brazilian drivers have as many as three fuel options: pure ethanol, gasoline, or mixed fuel. As the price of ethanol goes up, consumers tend to switch to gas. 

A third, cyclical factor compounded the problem last month, forcing the government to address the issue. Ethanol depends on sugar cane production, and sugar is only harvested for seven months per year. Prices soared this year during the dry period between December and April, which Brazilians refer to as the “between-harvest.” Fuel distributors paid as much as three reais per liter of mixed fuel last month—the highest price on record, according to Reuters. As the harvest takes off and production rises once more, Brazilian policymakers expect prices to return to lower levels. “Beginning tomorrow we’ll be able to clearly see a drop in the price of ethanol at the pump,” Energy and Mining Minister Edison Lobão said Monday.

The arrival of the harvest didn’t stop the government from taking action, however. A provisional measure decreed by the Rousseff administration reduced the minimum requisite amount of ethanol in mixed fuel from 20 to 18 percent—an action designed to keep the price for mixed fuel from rising and to alleviate pressure in regions experiencing ethanol shortages. The measure also officially designated sugarcane as a fuel rather than a food for the first time, passing the entire ethanol supply chain, including sugar mills, to the National Petroleum Agency for regulatory purposes. 

Brazil’s ethanol hiccups provided an opportunity for U.S. producers. Mostly corn-based, U.S. ethanol production skyrocketed from 2.3 billion liters in 1985 to 50.2 billion liters in 2010, according to the Renewable Fuels Association. Most of that growth occurred recently; the figure doubled between 2007 and last year. Filling the gap left by shortages in the Brazilian domestic market, U.S. ethanol exports to Brazil jumped from 1 million liters in 2009 to 70 million liters in 2010, according to the Financial Times. 

Meanwhile, Brazil’s ethanol exporters face obstacles in the U.S. market. U.S. Congressmen Chuck Grassley (R-IA) and Kent Conrad (D-ND) proposed legislation last week that would significantly reduce ethanol subsidies over the next three years. But the measure would not alter a 15 percent-per-gallon tariff on ethanol imports that the Brazilian government wants to see eliminated. Rousseff says she opposes the tariff and Reuters reported in January that her administration plans to bring a complaint against the tax to the World Trade Organization, though no action has been taken yet. 

Notwithstanding the competition, Brazilian ethanol producers remain optimistic. The São Paulo-based Center for Sugarcane Technology, an industry-funded group, pointed out in a statement that ethanol producers need to increase efficiency and find new markets. It also expressed confidence in the industry’s future: “Can we replace diesel? Yes! Can we produce airplane fuel? Yes!” 

Learn more:

• Read Dilma Rousseff and Brazil's Oil Sector, an issue brief by AS/COA's Energy Action Group.
• View a multimedia presentation on biofuels from Brazil's state-controlled oil company Petrobras.
• Read a statement on the potential of the ethanol industry from the Center for Sugarcane Technology.
• A 2006 article in The Washington Post narrates the development of Brazil's ethanol industry.