Brazilian Sugar Policy

Alexandre Rands Barros e Carlos Magno Lopes UFPE e Datamétrica

August, 2012

What are the questions?

Does Brazil have any policy that helps domestic sugar production and can support a future expansion?

◦ No.

Can local production continue to expand and, if so, for how long?

◦ Yes, for at least the next 10 years.

Is Brazil a thread to the world sugar economy?

◦ No. It is a solution.

Brazilian sugar policy is quite simple.

Policies are directed towards two markets that are intrinsically connected. ◦ Sugar market.

◦ Biofuel market.

Policy in both markets are the same: ◦ Laissez faire - laissez passer.

Of course there are basic institutional rules. ◦ They are designed to assure free market rules.

◦ Both markets are subject to taxes, as all sectors in the Brazilian economy.

Policy

Market has particular features that are relevant to determine its dynamics and institutional framework.

There is a world market for sugar, where Brazil is a major exporter. ◦ Local dynamics affects world market equilibrium and prices.

There is also some world market for alcohol biofuel. ◦ It is small and highly regulated within domestic economies.

Sugarcane can be used alternatively to ethanol and sugar. ◦ A reasonable share of mills has ability to produce both outputs in

whatever proportion. • There is minimum proportion of alcohol, which is a byproduct of sugar production.

Brazilian cars can substitute alcohol for gas with 70% of relative efficiency.

There is addition of anhydrous ethanol on gasoline in Brazil. ◦ The share is determined by public policy.

International trade on gasoline is free in Brazil.

Policy

Brazilian sugar market is integrated with other markets.

World markets

Sugar market. ◦ Brazilian share is around 50% of

total supply.

Petroleum market ◦ Gasoline market ◦ Brazil is a small player as it is

almost self sufficient on oil.

Corn market. ◦ Through US biofuel prices and

trade.

Ethanol market ◦ Alternative use of sugarcane on

production

Brazilian domestic market

Sugar market.

Petroleum market ◦ Gasoline market

Ethanol market

Policy

Schematic representation of markets and potential policy reach.

World markets Brazilian domestic markets

Sugar market

Oil market

Ethanol and corn markets

Sugar market

Oil market

Ethanol market

Brazilian market affects world market

Brazilian market does not affect world market

Brazilian market affects world market

Policy

Brazilian share of world sugar exports is over 50%.

0

10

20

30

40

50

60

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

a

20

12

a

Brazilian share on world sugar exports

Source: FAO a: Authors´estimations using data from USDA.

Regulated market

Policy

Phases of recent periods.

0

10

20

30

40

50

60

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

a

20

12

a

Brazilian share on world sugar exports

Source: FAO a: Authors´estimations using data from USDA.

Regulated market

Reaching Flex fuel equilibrium

Equilibrium with weak alcohol domestic market

Policy

Brazil has a marginal role on oil market.

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Brazilian share on world consumption, production and imports of oil (%)

Brazilian share on world oil consumption Brazilian share on world oil production

Brazilian share on World oil imports Source: ANP and BP Statistical Review of World Energy June 2012

Policy

Ethanol market is small but its use of sugarcane can affect sugar market.

24.7 28.0

33.6 35.1 39.1 40.1 38.4 36.6

42.5 47.1 47.1 48.9

52.5 51.8 51.5 49.9 52.3 46.6

40.7 40.8 45.7 48.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

Share of sugarcane directed to sugar and ethanol production in Brazil (%) Crop years: 1990/91 to 2011/2012

Proportion of Sugarcane used on ethanol production Proportion of Sugarcane used on sugar production

Source: Authors calculation with data from UNICA and CONAB, Perfil do Setor do açúcar e do álcool no Brasil 2008/2009, Brasília: CONAB, 2010.

Policy

Corn market is already affected by its use on ethanol production.

Share used of corn for ethanol in the US reached 37% in 2011.

Policy

Dynamics of integration

Changes in world supply or demand affects world equilibrium

sugar prices

This leads to a change in demand for Brazilian sugar.

P

P1

P0

P

P1

P0

This higher prices attracts sugarcane from alcohol to sugar

increasing local and international sugar supply. P

P1

P2

Prices for ethanol will increase because of supply movement

P

P1

P0

This will increase demand for gasoline, but prices will not be

affected P

P0

Corn prices can rise because of higher demand to make ethanol.

Ceteris paribus, world sugar prices tend to be more stable because of integration with ethanol market and flex fuel cars in Brazil.

Policy

Policy instrument for sugar market.

Sugar: ◦ Local sugar Production and consumption are free.

• Taxes are the only public sector instruments to affect them. – They are higher than for the set of agricultural sectors altogether.

Ethanol market: ◦ Local ethanol production and consumption are also free.

• Taxes also can affect them.

• There are government definition of percentual addition of anhydrous alcohol on gasoline.

Gasoline: ◦ Wholesale prices are strongly influenced by government.

• Major supplier is a State company (Petrobrás).

• There is a especial tribute (CIDE) which applies to fossil fuel. – Currently it is 0% on gasoline.

Policy

Tributes are high for alcohol and sugar.

0%

2%

4%

6%

8%

10%

12%

14%

16%

2002 2003 2004 2005 2006

Taxes burden percentage on gross revenue in the Alcohol-Sugar sector in Brazil, 2002-2006

Actual direct taxes burden Actual indirect taxes burden Total taxes burden

Source: Joia, Fregonesi and Resende, "Análise da Carga Tributária no Setor Sucroalcooleiro," Qualitas Revista Eletrônica, 1(1): 0-20, 2011.

Policy

Taxes for domestic ethanol consumption are even higher.

Producer prices, 59.4%

State taxes (ICMS), 26.5%

PIS/COFINS, 5.5%

Distributor margin, 1.8%

Retailer margins (gas

stations), 6.8%

Proportion of items on ethanol retail price composition

Total taxes (ICMS+PIS+Cofins) = 32%.

Source: Authors calculation with data from Jornal do Commercio.

Policy

Taxes plus logistic and trade costs are quite high in Brazil.

0%

50%

100%

150%

200%

250%

Proportion of consumer to producer prices in São Paulo

Souce: Calculated with data from ÚNICA.

Policy

Definitions of proportion of anhidrous alcohol added to gasoline can be important to the sector

Governments incentives. ◦ Low prices for gasoline, but not sufficiently low to damage

Petrobrás profitability. • Inflation control. • This implies in more alcohol on gasoline.

Producing sector incentives. ◦ Change proportion as world market prices for sugar and

alcohol change. • If Brazil was a price taker this would imply in a simple rule.

– Brazilian share on world sugar market makes this a more complicated game.

• There are producers who cannot produce sugar. They always want a higher share.

A price of democracy is that these adjustments are not optimal.

Policy

Summing up: Is there relevant policies to support the sector?

There is no specific policy to the sugar sector in Brazil. ◦ They pay taxes as most other sectors. ◦ They are even higher than those to exporting agriculture.

The major policy instrument available is the central government influence on gasoline price definition. ◦ It is not used o benefit the sector.

• Inflation control and equilibrium of profitability of Petrobrás are the major targets.

Brazilian sugar sector integrates the dynamics of sugar market to three others. ◦ Oil market Stable and it is not affected by any Brazilian policy. ◦ Ethanol market It is highly influenced by Brazilian

developments. ◦ Corn market Brazil does not have any influence on this. It

brings the USA policies to the game.

Policy

Can local production continue to expand and, if so, for how long?

Current sugar prices are high for domestic producers.

0

20

40

60

80

100

120

140

160

19

57

.01

19

58

.08

19

60

.03

19

61

.10

19

63

.05

19

64

.12

19

66

.07

19

68

.02

19

69

.09

19

71

.04

19

72

.11

19

74

.06

19

76

.01

19

77

.08

19

79

.03

19

80

.10

19

82

.05

19

83

.12

19

85

.07

19

87

.02

19

88

.09

19

90

.04

19

91

.11

19

93

.06

19

95

.01

19

96

.08

19

98

.03

19

99

.10

20

01

.05

20

02

.12

20

04

.07

20

06

.02

20

07

.09

20

09

.04

20

10

.11

World sugar prices on Brazilian producers perspective Constant prices on Brazilian R$

NY # 11 Brazilian perspectives Avg BR 5 years Avg 3 years Avg 1985-2012

World recent sugar prices are attractive to Brazilian producers (US$ cents/lb

Perspectives

World sugar prices has been persistently over local average costs.

0

5

10

15

20

25

30

2007/2008 2008/2009

2009/2010 2010/2011

US

cen

ts/p

ou

nd

Brazilian current costs and world sugar prices (US cents/Pound)

Expansão Tradicional

Nordeste World prices

Source: ESALQ, Custos de produção de cana de açúcar, açúcar e etanol no Brasil: Fechamento da safra 2010/2011, Ribeirão Preto: ESALQ, 2012.

Perspectives

Brazilian exchange rate is overvalued for its historical behavior.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

19

68

.01

19

69

.07

19

71

.01

19

72

.07

19

74

.01

19

75

.07

19

77

.01

19

78

.07

19

80

.01

19

81

.07

19

83

.01

19

84

.07

19

86

.01

19

87

.07

19

89

.01

19

90

.07

19

92

.01

19

93

.07

19

95

.01

19

96

.07

19

98

.01

19

99

.07

20

01

.01

20

02

.07

20

04

.01

20

05

.07

20

07

.01

20

08

.07

20

10

.01

20

11

.07

Brazilian real exchange rate R$/US$

Source: IPEADATA. Note: Prices are IGP-DI, Disponibilidade interna.

Perspectives

If it comes up to the R$ 2,3 level, profitability will rise.

Expansions will pick up again.

It will not have problems with area, as Brazilian production is concentrated in particular areas.

It used only 1,08% of Brazilian total territory in 2010. • Only 9,2 million

hectares. • Area smaller than the

one Pernambuco. • Brazil has 851,5 millions

hectares.

Expansions are mainly over cattle raising areas. ◦ Already deforested.

They are further from alcohol consumer centers. ◦ Increases costs.

Perspectives

Summing up for perspectives.

Production still can grow as profitability is currently reasonable. ◦ Projected expansions will catch up slowly.

Its long term trend will depend on: ◦ Brazilian exchange rate.

• Upward tendency Recover balance of payment old equilibrium.

◦ Prices of gasoline. • Tendency is to increase because of Petrobrás lost of profitability.

◦ Technological developments. • Ethanol second generation.

• Energy from bagasse.

Perspectives

Is Brazil a thread to the world sugar economy?

Its size is not a thread but a solution.

Brazilian introduced arbitrage between markets reinforce price stability. ◦ More markets to dumping localized adverse shocks.

Brazil tends to generate further stability in the world sugar economy in the near future. ◦ Exchange rate tends to be stable in the long term with a

slow devaluation movement in the medium term. • There is no expectations of sudden changes in relative profitability

which would move sugarcane production to one or another output.

Government is about to recover Petrobrás profitability and to use it as a buffer to world oil fluctuations. ◦ Soon Brazil will become a stable oil exporter.

Thread?

Brazil has already brought price stability for the world sugar market.

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

19

65

.01

19

66

.05

19

67

.09

19

69

.01

19

70

.05

19

71

.09

19

73

.01

19

74

.05

19

75

.09

19

77

.01

19

78

.05

19

79

.09

19

81

.01

19

82

.05

19

83

.09

19

85

.01

19

86

.05

19

87

.09

19

89

.01

19

90

.05

19

91

.09

19

93

.01

19

94

.05

19

95

.09

19

97

.01

19

98

.05

19

99

.09

20

01

.01

20

02

.05

20

03

.09

20

05

.01

20

06

.05

20

07

.09

20

09

.01

20

10

.05

20

11

.09

Coefficient of variation for monthly sugar and oil world prices 24 months moving average

Oil prices Sugar prices Source: IPEADATA.

Brazilian market liberalization

Petrobrás absorbed domestically world oil shock

Domestic currency stability

Thread?

Summing up for the thread.

Brazil is not thread to the world sugar economy.

◦ It brought stability to world prices.

It still will continue to grow its domestic production.

◦ It could be viewed as a thread to those who think in expanding exports at the expenses of someone else.

• There is no sign that Brazilian sugar production will retreat easily.

Thread?

Major conclusions.

Brazilian sugar policy is quite simple: ◦ Free market for sugar and ethanol.

Taxes paid by the sector are high, when compared to other primary commodities. ◦ Specially considering that it exports a reasonable share of its

output.

Government has two major instruments to affect the sector: ◦ Definition of the share of anhydrous ethanol on gasoline. ◦ Price of gasoline which is much determined by PETROBRAS, a

state controlled company.

Government incentives in both cases can conflict with the sector interest. Sugarcane expansion in Brazil will not destroy our rain forest.