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INFO RUEHRI/AMCONSUL RIO DE JANEIRO 1928
RUEHSO/AMCONSUL SAO PAULO 6808
RUEHRG/AMCONSUL RECIFE 4648
RUEHBU/AMEMBASSY BUENOS AIRES 3952
RUEHSG/AMEMBASSY SANTIAGO 5447
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UNCLAS SECTION 01 OF 02 BRASILIA 000788 
 
SIPDIS 
 
SIPDIS 
 
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DEPT PLEASE PASS TO USTR FOR MSULLIVAN 
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E.O. 12958: N/A 
TAGS: TRGY SENV ENRG KSCA ETRD EAGR BR
SUBJECT: THE ETHANOL DILEMMA - INADEDQUATE SUPPLY VS GROWING DEMAND 
 
¶1.  Summary: As countries worldwide search for alternatives to 
increasingly expensive petroleum, not to mention green fuel 
alternatives that help meet Kyoto Protocol targets, Brazil finds 
itself in an enviable position.  The world's largest producer of 
both ethanol and sugar is the purveyor of technology, infrastructure 
and processes that could help fuel a biofuel revolution.  In fact, 
Brazil's ethanol program is so successful it has drawn the likes of 
Bill Gates and Google's founders, Sergey Brin and Larry Page, into 
the fray, promoting expanded ethanol production in the United 
States.   Yet, despite the monumental success of ethanol in Brazil, 
it is not happening without some growing pains. 
 
¶2.  Brazil now finds itself in the unforeseen position of not having 
enough supply to satisfy demand. The unanticipated flex-fuel boom in 
Brazil coupled with increasing international demand for ethanol is 
exerting serious pressure on Brazil's domestic production apparatus. 
 Sales of flex-fuel cars reached approximately 80% of new vehicle 
sales in 2005.  The resulting increase in demand for ethanol 
necessarily led to price increases.  Moreover, ethanol exports 
increased by 1.8 billion liters in 2005 (a 269% jump over 2004). 
This facet of increased demand is compounded by the fact that 
foreign importers are offering a price 8-10% higher than Brazil's 
internal market.  During the current interharvest period supplies 
are limited and prices have skyrocketed, leaving Brazilian consumers 
and officials with little hope for price reductions until production 
renews at the end of April.  Taken as an omen, one of the most 
pressing questions facing Brazil is how to create an infrastructure 
which can deal with the escalated demand for ethanol. 
End Summary 
 
¶3. The question of how Brazil intends to address this supply and 
demand issue is still up for debate.  In conversations with Scioff, 
Angelo Bressan, Director of the Ministry of Agricultures 
sugar/alcohol division, noted that the GoB has only two ways to 
regulate ethanol.  The first involves adjusting the requisite amount 
of ethanol to be mixed in gasoline.  The GoB recently utilized this 
approach dropping the percentage from 25 to 20%. (reftel)  Although 
this measure increased supply, it had little to no effect on prices. 
 A second option would be to regulate ethanol exports by, for 
example, linking exports to domestic stocks via a system of quotas, 
but leaving prices free.  This argument has been negatively received 
both by industry and free market advocates within the GoB.  Unica 
(the Sao Paulo Sugarcane Industry Association) believes that this 
mechanism would not be able to function without government 
interference in pricing.  Bressan noted that the GoB and industry 
have had an open dialogue focusing on how to address the problem of 
supply but without any decisive outcomes as of yet. 
 
¶4. The sugar/alcohol industry, for its part, is looking to expand 
both the area of planted cane and the industry's capacity to refine 
it.  Preliminary estimates are that US$ 14 billion is going to be 
invested into refineries that can crush and produce sugar/alcohol by 
¶2011.  Meanwhile, another US$ 7 billion is being invested into 
expanding cultivated land.  Bressan added that 11 new refineries are 
already under construction with an additional 16 planned for 2007. 
That said, the analgesic effects of these investments are still some 
years away.  Because it is not cost-effective to transport cane long 
distances, refineries and agricultural lands must remain in close 
proximity.  Once a distillery is completed, there will still be a 
12-15 month lag time (the crop cycle for cane) before production 
commences.  Moreover, the upward swoop of land prices in cane 
producing regions (49% over the last year, compared to the national 
average of 2%), is certain to become an obstacle to the expanding 
industry. 
 
¶5.  This, of course, does not address the GoB's principal concern of 
how to maintain competitive prices for ethanol during the 
interharvest period.  Bressan has stated that the GoB and industry 
are discussing palliative measures but failed to expand on what they 
 
BRASILIA 00000788  002 OF 002 
 
 
were.  They are simply "discussing the issue."  The most prominent 
idea, reflected in numerous media accounts, is to create stockpiles 
of sufficient size to guarantee supply.  While the industry and 
government agree to the idea in concept, both sides dispute who 
should be responsible for creating mechanisms and supplying the 
necessary funding for the stocks.  While Roberto Rodrigues, Brazil's 
Minister of Agriculture, initially said that the government was 
studying inexpensive financing mechanisms for creating stocks, he 
later retracted those comments affirming that stocks are the 
responsibility of the productive chain. 
 
¶6. In terms of Brazil and the United States, and the growing 
attention exhibited by parties like Gates, Brin and Page, and rising 
interest in California, Bressan noted that the Ministry would like 
to see U.S. tariff barriers dropped on combustible ethanol.  But, he 
stated, it needed to be done in a systematic fashion.  He fears that 
when the U.S. market opens, Brazilian consumers will be adversely 
affected by a dearth in supply resulting from profit hungry 
exporters.  Bressan further maintained that the GoB has an interest 
in creating a world market and that the U.S. and Brazil should work 
together to achieve that goal.  He added too, that countries, 
including the U.S., have a vested interest in working with Brazil 
because of the "know-how" they have regarding the production and 
processing of ethanol. 
 
¶7.  A crucial link in this process, from his perspective, will be 
spreading the supply chain throughout the developing world, 
especially in Africa and Asia.  The U.S. and Brazil, he stated 
emphatically, are not capable of sustaining a world ethanol market 
on their own.  That, of course, has not stopped the likes of 
Petrobras from signing a contract in February to build a pipeline 
from Goias (one of Brazil's principal cane producing regions) down 
to Brazil's largest port in Santos.  A portent of how industry views 
the future role of ethanol. 
 
¶8. Comment: In the short-term, it is clear that alcohol induced 
euphoria will continue the industry's ascension.  As the world's 
largest producer of sugar and alcohol, Brazil is taking measures to 
increase production and at least discussing how to satisfy supply in 
the boom time.  In response to the crisis over the last four months 
and the elevated prices, the GoB has recognized its impotence and is 
"throwing in the towel", waiting for the new harvest.  This is 
currently underway, and greater supplies of ethanol are expected in 
filling stations by early May. End Comment 
 
LINEHAN