Viewpoint: Brazil chases corn ethanol output growth

Brazil has long relied on sugarcane as a feedstock for ethanol processing, but the corn-based version of the biofuel is likely to expand its share of the country's production mix as investor interest increases.

New ethanol plant announcements are popping up across the country. The plants themselves are not unusual, given Brazil's rich history in biofuel production — especially ethanol from sugarcane. What is drawing attention is the feedstock these plants are processing.

"Sugarcane ethanol is less competitive than corn ethanol right now, so it makes sense for us to pay attention and migrate to the higher margin product," Sao Martinho chief financial officer Felipe Vicchiato said during the firm's second-quarter earnings call.

His views echo a consensus among domestic participants that corn-based biofuel output is poised to take large portions of new output in Brazil, with attractive growth potential via both greenfield and brownfield opportunities.

In June 2019, Sao Martinho revealed it would invest R350mn ($70mn) in a corn-processing unit on the site of its existing sugarcane mill in Boa Vista, in central-western Goias state, an area on the fringe of the country's sugarcane belt that overlaps with Brazil's corn belt.

The firm joined veteran sugarcane mills such as Cerradinho and Pindorama that added a corn-based ethanol plant to leverage its existing infrastructure, in line with the rapid success of Brazilian corn-ethanol pioneer FS and the arrival of Paraguayan group Inpasa in Brazil.

Sao Martinho's newly-built plant came on line just in time for the start of the 2023-2024 season, helping increase biofuel volumes but also allowing the firm to allocate a greater share of sugarcane to sugar processing.

Underpinning this strategy is a bullish view of supply and demand for corn ethanol and its byproducts, particularly dried distillers' grain (DDG) — a corn bran, rich in protein and fiber that is used as a lower-cost alternative to soybean meal to fatten animals.

This narrative, Vicchiato said, is enhanced by juxtaposing the revenues from DDG with lower electricity prices in Brazil's power market, which has narrowed margins for sugarcane-based ethanol milling groups that are able to generate surplus electricity for sale to the national grid.

That is not to say that Sao Martinho has no sugarcane projects in the pipeline. But none of them involve elevating its sugarcane ethanol capacity. "We are evaluating a second corn ethanol plant or sugar-only processing unit in Boa Vista, if the economics make sense," Vicchiato said.

Pros and cons

A survey carried out by Argus found that 15 new non-sugarcane ethanol plants were announced in 2023, but there might be more on the way, some projects more ambitious than others.

Inpasa plans to invest up to R2.5bn to build a plant in northeastern Maranhao state, expanding its presence in the region, which has been traditionally dominated by local sugarcane milling companies or the trading-arms of large fuel retailers such as Raizen. A flagship R556mn investment by producer Be8 in Rio Grande do Sul has yet to move ahead, but could help solve the southern state's structural deficit in ethanol. Despite regional production, it must bring biofuel from nearby states to meet demand.

One of the main drivers that inspired these companies to pursue biofuel production from corn or other grains is ample availability of low-cost supplies, with a record winter — or second — crop allowing year-long stockpiles.

Investment bank analysts said ethanol plants in Brazil that use any feedstock are capital intensive, but the return on investment (ROI) on corn-based ethanol projects is faster compared to its sweeter competitor.

But securing biomass could be a challenge to expand corn ethanol production. Most ethanol facilities in the country use bagasse — the biomass from the sugarcane crushing process — to meet its own production energy needs. But corn ethanol plants rely on burning eucalyptus or other types of biomass to power operations.

Changing dynamics

Some argue that the added output could shift trading dynamics in the spot market, where companies pursue a "carry" strategy of stockpiling biofuel to benefit from higher prices during the so-called inter-harvest, when cane mills stop their crushing activities.

Sugarcane has a limited growing season and cannot be stored as it starts fermenting as soon as it is cut, while corn ethanol units can produce year-round.

But Raizen chief executive Ricardo Mussa dismisses any immediate impact. "Corn ethanol figures are very linear. It is quite predictable," he told Argus. "Volumes are not enough to change the inter-harvest equation in the shorter term."

Looking ahead, corn ethanol industry body Unem predicts that production will reach 10bn l (172,320 b/d) by 2030, or more than 20pc of the Brazilian fuel market. For the 2023-24 season, which started in April, the association expects output to reach 6bn l, rising by almost 37pc from the previous season.

By Vinicius Damazio