The Transferability of Brazilian Knowledge and Technology Donald Mitchell* World Bank *Lead Economist, Development Prospects Group April 25, 2006

Sugar cane as an energy crop Sugar cane produces a large amount of biomass per hectare (80 tons) Sugar cane produces a large amount of biomass per hectare (80 tons) Cane juice can produce ethanol or sugar Cane juice can produce ethanol or sugar Bagasse can be burned to produce electricity Bagasse can be burned to produce electricity Molasses can be used to produce ethanol, other alcohols and other products Molasses can be used to produce ethanol, other alcohols and other products

Potential as energy crop depends on: Price of sugar Price of sugar Price of energy Price of energy Government incentives Government incentives Environmental benefits Environmental benefits

Co-generation seems to hold the greatest promise Cane residue (bagasse) is a clean burning fuel Cane residue (bagasse) is a clean burning fuel High pressure boilers can produce electricity from bagasse to power sugar factory and supply electricity to national grid High pressure boilers can produce electricity from bagasse to power sugar factory and supply electricity to national grid Economically viable because bagasse has almost no other value Economically viable because bagasse has almost no other value Reduces cost of sugar production by removing power plant from factory Reduces cost of sugar production by removing power plant from factory

Ethanol economics Prices of ethanol have been high and sugar low – ideal conditions for ethanol Prices of ethanol have been high and sugar low – ideal conditions for ethanol But sugar prices have tripled in past two year which changes the profitability But sugar prices have tripled in past two year which changes the profitability Ethanol is profitable in Brazil because it is the world’s lowest cost producer of sugar and has large installed ethanol production capacity Ethanol is profitable in Brazil because it is the world’s lowest cost producer of sugar and has large installed ethanol production capacity

Equivalent prices of sugar, ethanol gasoline, and crude oil Raw Sugar EthanolGasoline Crude oil $/ton¢/lb$/liter$/gallon$/bbl Current market prices: Energy prices needed to make ethanol profitable:

Understanding the risks Crude oil prices are at record highs and will likely fall over the longer term Crude oil prices are at record highs and will likely fall over the longer term The global sugar market is undergoing a major restructuring and prices may not return to previous lows The global sugar market is undergoing a major restructuring and prices may not return to previous lows Large investments in ethanol could become very unprofitable Large investments in ethanol could become very unprofitable Large subsidies to ethanol production divert resources away from more economic uses Large subsidies to ethanol production divert resources away from more economic uses

Crude oil prices $/bbl

Crude oil prices are high because Lack of surplus production capacity due to many years of low prices and little incentive to invest Lack of surplus production capacity due to many years of low prices and little incentive to invest Rapid demand growth from China and other countries Rapid demand growth from China and other countries Supply disruptions – hurricanes in US, strikes in Nigeria, terrorist strikes in Iraq Supply disruptions – hurricanes in US, strikes in Nigeria, terrorist strikes in Iraq Uncertainty about future supplies Uncertainty about future supplies

Crude oil prices $/bbl Forecast

Sugar market in transition EU policy reform could make the EU a large net importer EU policy reform could make the EU a large net importer Many ACP countries will reduce exports because of EU price cuts Many ACP countries will reduce exports because of EU price cuts Global sugar market will be restructured Global sugar market will be restructured Sugar prices may not return to previous low levels Sugar prices may not return to previous low levels

Sugar prices

Forecast

Conclusion Co-generation appears to be profitable and has environmental advantages Co-generation appears to be profitable and has environmental advantages Ethanol production from sugar cane is not profitable for most countries even at current high prices Ethanol production from sugar cane is not profitable for most countries even at current high prices Risk to investing in ethanol production is that energy prices will fall and/or sugar prices will remain high, and … Risk to investing in ethanol production is that energy prices will fall and/or sugar prices will remain high, and …

Governments could be left supporting large ethanol industries which are unprofitable Governments could be left supporting large ethanol industries which are unprofitable Resources could be diverted from more efficient uses such as food crop or export crop production Resources could be diverted from more efficient uses such as food crop or export crop production