SAO PAULO, Brazil (DTN) -- Brazilian farmers can thank the ethanol boom for pushing
up soybean prices and dragging them out of a three-year liquidity crisis. But they
are now looking to biodiesel to secure their long-term survival. While Brazil has
been producing ethanol for over 30 years, starting back in the 1970s during the
oil crisis, it is a relative newcomer to the biodiesel market. Last year production
was a mere 12 million gallons, or 20 times less than the 250 million gallons
produced by the U.S. But this could soon change: Brazil has a 2-percent
biodiesel mandate going into effect in January 2008. This will increase to a
5-percent mix by 2013, or possibly earlier, if there is sufficient supply. The
2-percent mix will mean instant demand for around 211 million gallons of
biodiesel a year, which the industry says it will have no problem supplying.
"Brazil is fast becoming a world center for alternative fuels production,"
said Alfred Szwarc, director at Brazil's sugarcane producers association Unica.
"We have the right climate, relatively low production costs and the technical
know-how." Following a flood of foreign and local investmentsover the past 12
months, there are currently 36 biodiesel plants installed around the country,
with around 400 million gallons of production capacity.With a another 22 plants
ready to come online in the coming months, production capacity is expected
to double to nearly 800 million gallons by the end of the year. "Once momentum
gets going and if the government gets behind it, we can easily become the
world's biggest biodiesel producers in a few years," Szwarc said.That position
is currently held by the U.S. with production capacity of around 1.4 billion gallons
and another 1.89 billion gallons of capacity set to come online in the next few
years.
LIMITED DEMAND
While Brazil may well become the world's largest biodiesel producer some day,
it is unlikely to become the world's largest consumer.Less than 1 percent of
Brazilian cars run on diesel, partly due to the fact that the government actually
banned diesel-run automobiles in the 1970s in order to promote the use of
ethanol cars.The ban was lifted in the early 1980s, but diesel cars never
caught on and last year sales were a mere 26,000 units, or less than 1
percent of total car sales, similar to the U.S. This is in sharp contrast with
Europe, where 55 percent of the cars are diesel powered; in France and Italy
alone 80 to 90 percent of the cars have diesel engines. In Brazil, flex-fuel cars,
which run on ethanol or gasoline, are the most popular choice among consumers.
These vehicles represent around 69 percent of new car sales while gasoline-run
cars make up most of the rest.And even if Brazil did manage to increase the
popularity of diesel-engine cars, which is unlikely given the growing popularity of
flex-fuel cars, it still has a tiny fleet compared to other developed nations.Only
about one in eight people own a car in Brazil, with a fleet size of around 23
million, compared to 1.2 cars per inhabitant in the U.S., or a total of 250 million
cars. Over 60 percent of Brazilian cars run on extremely fuel efficient 1000cc
engines, with total fuel consumption at around 8 billion gallons a year, compared
to the 140 billion gallons of gasoline consumed by U.S. cars each year.Indeed,
all of Brazil's biodiesel demand will come from trucks, buses and farm machinery,
which run exclusively on diesel. Brazil has 1.5 million trucks and 400,000 buses
that consume over 10 billion gallons of diesel a year. In the U.S. the truck fleet
totals around 8 million. The trucks and the 800,000 buses on the road, guzzle
around 50 billion gallons of diesel a year.
VALUE-ADDED
Brazilian farmers will, however, be looking at the local market and indeed their
own fuel needs before taking on world demand. Brazil has a fleet of 350,000
tractors and 50,000 combines, which could soon be running on 100 percent
biodiesel following a recent go ahead from the government. All that needs to be
resolved are technical issues.Farmers, particularly in Mato Grosso, are eager
to cut fuel costs, which have risen sharply over the past year. "We are
especially vulnerable to high fuel costs, given our distance from the market,
said Rui Prado, head of the Mato Grosso farmers association. "The idea is to
add value to our soy production and increase local demand."Mato Grosso's
biodiesel production is expected to increase 400 percent to 300 million gallons
by the end of next year, with four plants already in operation and another two
set to come online by the end of the year. Farmers currently pay around $4.00
a gallon for diesel, which is double the price in neighboring countries such as
Paraguay and Argentina, where the fuel is subsidized. It takes around five
gallons of diesel to produce an acre of soybeans. This costs $20.00 an acre,
compared to just $6.00 in 2002. Farmers hope that by producing their own
biodiesel, they can cut this cost by half.
FEEDSTOCK
While Brazil and the U.S. differ in the way they produce ethanol, both countries
predominantly use soy oil in the production of biodiesel. Around 90 percent of
Brazil's biodiesel is produced using soy oil while the remaining 10 percent, mainly
in the north and northeast of the country, is made from palm and castor oil.
While this is good news for soy farmers, the recent spike in soy prices has some
in the biodiesel industry questioning the logic of relying so heavily on one
feedstock.Soy oil prices are currently trading at around 36 cents a pound,
compared to 15 cents a pound in 1999, mostly due to higher demand from the
biofuels sector. Apart from the cost, soy is also not the most efficient feedstock.
Soy only contains around 17 to 20 percent oil and one bushel of soybeans will
produce 1.5 gallons of biodiesel. This translates to roughly 60 gallons of
biodiesel per acre, which seems very inefficient given that one acre of corn
can produce 540 gallons of ethanol. There are other biodiesel feedstocks,
such as sunflower, canola and castor, with over 40 percent oil content. And palm,
with 26 percent oil content, can be produced all year round, as opposed to just
three months of the year for soybeans. However, the problem with these
feedstocks is that they are also expensive and in limited supply. Soy is the
most easily available and most liquid of all options and is likely to remain the
most popular feedstock for biodiesel in the near future. Industry officials are
looking to the government to help out, like they did with the ethanol industry
in the early days, by providing incentives and tax breaks for all biodiesel
feedstocks. At the moment only biodiesel producers that buy at least 30
percent of their feedstock from small, rural farmers, qualify for government
benefits. "Brazil has all the right ingredients to become a huge biodiesel producer,"
said Geraldo Santana, head of the Esalq agricultural research center in Campinas.
"However, it needs to look at distribution, storage and the right incentives for
the program to be a success."
Kieran Gartlan can be reached at Kieran.gartlan@dtn.com
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