Competition for Sugarcane in the State of São Paulo – An Exploratory Analysis Using Maps

Walter Belik IE / UNICAMP

17th ICABR Conference

Ravello, 2013

Expansion of Sugarcane in the state of S. Paulo

• S. Paulo State is the main producer of sugarcane in Brazil: 56,8% (2012).

• There are 187 plants (2011/12) (an increase of 36,5% comparing to harvest 1999/2000. Due to the economic crisis the expansion stopped and 15 plants are in insolvency.

• The area of sugarcane in S. Paulo reached 5.2 million of hectares in 2012.

Institutional Environment in the Brazilian Ethanol Industry

• 1990s – Deregulation and price liberalization;– First Ethanol exports

• 2000 – 2007 – Rise in the oil prices;– Flex fuel vehicles introduced in Brazil;– Foreign capital entry in sector;– Green Protocol in the state of São Paulo to anticipate the ending of

sugarcane burning by 2014• 2008 -2012

– International financial crisis– Delay in the US program to replace fossil fuels for bionergy ;– New discoveries of oil in Brazil (Pre-salt layer);– Non tariff barriers to Brazilian ethanol exports;– Loss of competitiveness compared to gasoline in the domestic market– Remarkable sugar prices in the international market

Expansion of Sugarcane in the state of S. Paulo

Government regions in the state of São Paulo

Proportion of area farmed with Sugarcane compared to total

agricultural area

Sugarcane Expansion

• Considering the crisis of Orange Production and the transformation in the use of pastures it seems that the expansion of sugarcane is far from reaching its limits in S. Paulo ;

• New areas farming sugarcane and new huge units have been installed in the West of Brazil.

Area Contribution Yeld Contribution

Brazil 65,98 34,02

Centro-Oeste 77,36 22,64

Mato Grosso do Sul 67,99 32,01

Mato Grosso 81,35 18,65

Goiás 81,41 18,59

Sugarcane growth production: 1990-2009

Area / Yeld Contribution to Growth

Source: Correa, 2013

Gain of Scale in Plants in the Sugarcane Processing

Gains from Specialization• Professionalization of the industrial management• Reduction of manpower - automation • Outsourcing of services

To Purchase Supplies and Loans• Power of negotiation• Access to international market

Law of large numbers• Negotiation with third party companies• Land lease contracts

Plant Location

Demarcation of territory

Barriers to entry

Specificities of the Assets

Physical and location-based specificities of sugarcane

– Transportation costs;

– Sucrose inversion.

Negative Externalities– Monoculture;– Elimination of

independent sugarcane farmer;

– Concentration of Political Power.

Favourable to concentration Unfavourable to concentration

Growth in the Size of Sugarcane Mills in S. Paulo

Milling scale

99/00units

08/09units

08/09(106 t/year)

99/00(106 t/year)

Growth in plants between 1999/2009

Growth in total milled between 1999 /2009

>5 3 7 44.7 19.3 133.3% 131.0%

4 to 5 4 10 43.6 17.2 150.0% 153.0%

3 to 4 8 14 47.2 27.7 75.0% 70.2%

2 to 3 13 42 101.9 30.2 223.1% 237.1%

1 to 2 50 60 88.0 73.4 20.0% 19.9%

Up to 1 m 59 36 21.0 29.2 -38.9% -28.2%

Total 137 169 346.3 197.1 23.4% 75.7 %

Source: Castro et al.

• Considering the plants in operation, there was a remarkable size increase in 10 years

• Almost 50% of S. Paulo production units have mill capacity over 2 millions tons / harvest comparing to 20% in the 99 /00 harvest

Growth in the Size of Sugarcane Mills in S. Paulo

2007-08 Harvest

2008-09 Harvest

2009-10 Harvest

Average Nominal Capacity for Milling (ton/day)

10,322 10,527 11,364

Average Distance to delivery sugarcane (km)

23.87 25.1 25.65

Percentage of sugarcane with average Distance over 40 km

15.2% 16.9% 18.4%

• Processing mills need to go further to collect the raw material; • Average economic radius to transporting sugarcane to industrial unit is 20

km (average conditions);• Loss in quality due to sucrose inversion;• Burned sugarcane X Raw sugarcane

Source: CONAB

The expansion of Large Sugarcane Mills in S. Paulo

Location of plants by size in the state of São Paulo 2011 Total unites considered in 2001: 187, less 15 units that were idle due to

financial problems

Source: authors based in information of MAPA

The expansion of Large Sugarcane Mills in S. Paulo

Competition for sugarcane in the state of São Paulo 2011

Real areas occupied with sugarcane vs Potential areas that could be occupied

Source: authors based in information of MAPA

The expansion of Large Sugarcane Mills in S. Paulo

Competition for sugarcane in the region of Ribeirão Preto and its neighboring regions 2011

Source: authors based in information of MAPA

High Concentration of Units and Scales of Processing

P. Prudente Piracicaba Ribeirão P. Araçatuba

Number of plants operating (2011) 6 6 20 13

Total Milling Capacity (t/harvest) 11,758,780 14,805,560 68,651,770 34,988,360

Average milling* (t/harvest) 1,959,797 2,467,593 3,432,589 2,691,412

Productivity (ton/ha) 75 70 85 85

Sugarcane Area Needed (ha) 156,392 222,083 803,226 409,364

Planted area of sugarcane 2010 (ha) 250,973 164,102 470,640 391,189

Area of sugarcane harvested** 210,817 137,846 395,338 328,599

Difference between necessary/planted sugarcane -54,426 84,238 407,888 80,765

Sugarcane crop needed to meet installed milling capacity by Government Region

• Presidente Prudente has a surplus of sugarcane compared to its processing scale

• The production need to double in Ribeirão Preto to meet the installed milling capacity;

• The impact of deficit of raw material could be the idleness of the plants

Conclusions

• Given the physical and locational based specificities of the assets it’s required a proximity between production of raw-material and processing;

• Due to the growth in the industrial scale the overlapping of production areas and the competition for suppliers is giving inefficiencies to some regions of Brazil;

• It is necessary to reintroduce some form of government regulation regarding the capacity of plants to be installed and their location.

Thank you