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UNCLAS SECTION 01 OF 02 BRASILIA 000498 
 
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DEPT PLEASE PASS TO SLADISLAW DOE 
 
E.O. 12958: N/A 
TAGS: TRGY SENV ENRG KSCA ETRD EAGR BR
SUBJECT: BRAZIL'S ADVENTURES IN ETHANOL 
 
 
¶1. Summary: Ethanol continues to be at the forefront of 
international politics, as sky-high oil prices have highlighted the 
necessity to find alternative fuels sources.  Brazil, with a 
30-year-old alcohol program and a sophisticated production and 
distribution infrastructure, is a model that many countries are 
trying to emulate.  Yet, for all of the emphasis being placed on 
ethanol, 2006 has shown alcohol's inherent weaknesses, stemming from 
limits on expanding production.  Although industry in Brazil has 
managed to stock a considerable amount of ethanol for the January to 
March intercrop period, demand is increasing more rapidly than 
sugarcane cultivation (which can only increase at a modest rate 
since it is a product with a multi-year cultivation cycle).  While 
the flex-car fleet expands by 150% a year, cane acreage expands by 
less than 10%.  This profoundly affects the supply and, therefore, 
cost of ethanol.  Ethanol has become so popular, with more than 80% 
of new light-vehicle sales in Brazil being flex-fuel and a surge in 
worldwide demand, that prices have nearly doubled in the past seven 
months. End Summary 
 
¶2. Steep price increases remain at the forefront of Brazil's present 
ethanol worries.  Since January, prices have risen to 70% the cost 
of gasoline, in almost every Brazilian state, making it more 
cost-effective for flex car owners to buy gasoline.  Responding to 
the price increases, the GoB struck a deal with the ethanol industry 
to erect a wholesale price ceiling of R$1.05/liter.  However, by 
mid-February prices were already hovering at R$1.07/liter and the 
current mean price is R$1.20/liter.  While the GoB has cried foul, 
industrialists maintain that prices have risen, in spite of the 
accord, because of "the enormous pressure exercised by the market". 
The GoB retaliated by reducing the quota of alcohol to be mixed with 
gasoline from 25-20% and has threatened to impose a system of export 
quotas, which would afford ethanol treatment similar to that for 
gasoline, in order to conserve ethanol stocks. 
 
¶3. While there are a number of factors exerting market pressure on 
ethanol, increased internal and external demand are the most 
important.  According to the Ministry of Agriculture, ethanol 
exports in January of 2006 were 93% higher than the previous year, 
and have increased 225% since 2000.  As the world's largest sugar 
and ethanol producer, this is in line with Brazil's future goals to 
propagate a world ethanol ethos and a market for its product. 
Additionally, a 10% surge in domestic consumption over the last 
year, fueled by a boom in flex-fuel car production, has taken 
analysts by surprise. 
 
¶4. To keep up with increased demand, the sugar/alcohol industry 
predicts needing investments of R$14 billion by 2010 to increase 
Brazil's milling capacity by 50% and another R$7 billion to expand 
crop area.  Similarly, the GoB estimates that the sugarcane industry 
will need an additional R$10 billion in investment by 2012, to add 
2.5 million new hectares of planted cane (a 50% increase) and 73 new 
refineries.  Nevertheless, there is still debate concerning how to 
combat future price fluctuations like those seen this year.  The GoB 
maintains that it is necessary to shore up the production chain, and 
Unica is requesting that the government create financial mechanisms 
or reserve stocks in order to guarantee price stability.  According 
to Unica's Onorio Kitayama, approximately R$3.5 billion is necessary 
to guarantee stocks of 5 billion liters which industry estimates 
would maintain price stability.  Other industry representatives, 
however, contend that "high prices during the intercrop period will 
continue," regardless of an increase in production potential. 
 
¶5. For the present, the Minister for Agriculture Roberto Rodriquez 
is assuring the public that ethanol stocks will last until ethanol 
production renews in May, negating claims that there is a "crisis of 
alcohol".  "There is not a crisis, not even a microcrisis.  It is 
clear that stocks are more than sufficient."  He also affirmed that 
Brazil has an additional 600 million liters of alcohol stocked away. 
 Although prices are expected to drop slightly with the new 
harvest/production cycle, the realization that sales will have to be 
rationed over the next twelve months to guarantee supply means that 
prices will remain higher than that to which Brazilians are 
 
BRASILIA 00000498  002 OF 002 
 
 
accustomed. 
 
¶6. Comment: Despite government attempts to control prices, market 
forces make Brazil's current situation demonstrative for two 
reasons.  First, it reveals the hazards of monoculture dependency, 
especially on a double-tasked crop like sugar, and the need to 
diversify ethanol sources.  Second, the scenario dictates that the 
present is the proper time for sugar/ethanol producers to invest in 
order to meet future demands.  Further updates on Brazil's ethanol 
matrix will follow. 
 
CHICOLA