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### Viewing cable 06BRASILIA788, THE ETHANOL DILEMMA - INADEDQUATE SUPPLY VS GROWING DEMAND

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
06BRASILIA788 | 2006-04-24 19:00 | 2011-07-11 00:00 | UNCLASSIFIED | Embassy Brasilia

`

    VZCZCXRO3060
    PP RUEHRG
    DE RUEHBR #0788/01 1141900
    ZNR UUUUU ZZH
    P 241900Z APR 06
    FM AMEMBASSY BRASILIA
    TO RUEHC/SECSTATE WASHDC PRIORITY 5190
    INFO RUEHRI/AMCONSUL RIO DE JANEIRO 1928
    RUEHSO/AMCONSUL SAO PAULO 6808
    RUEHRG/AMCONSUL RECIFE 4648
    RUEHBU/AMEMBASSY BUENOS AIRES 3952
    RUEHSG/AMEMBASSY SANTIAGO 5447
    RUEHAC/AMEMBASSY ASUNCION 5369
    RUEHMN/AMEMBASSY MONTEVIDEO 6189
    RUEHPE/AMEMBASSY LIMA 2953
    RUEHLP/AMEMBASSY LA PAZ 4520
    RUEHCV/AMEMBASSY CARACAS 3209
    RUEHBO/AMEMBASSY BOGOTA 3709
    RUEHGE/AMEMBASSY GEORGETOWN 1043
    RUEHQT/AMEMBASSY QUITO 1787
    RUCPDO/USDOC WASHDC
    RHEBAAA/USDOE WASHDC
    RUEATRS/DEPT OF TREASURY WASHDC

` `

    UNCLAS SECTION 01 OF 02 BRASILIA 000788

    SIPDIS

    SIPDIS

    DEPT FOR EWHITE OES/EGC AND PKELLY OES/STC; OES/ETC GTHOMPSON
    USDOE FOR SLADISLAW
    DEPT PLEASE PASS TO USTR FOR MSULLIVAN
    DEPT PLEASE PASS TO USAID FOR LAC/AA
    USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRSICOLL/MWAR D
    USDOC FOR 3134/ITA/USFCS/OIO/WH/RD/DANDERSON/SHUPKA

    E.O. 12958: N/A
    TAGS: TRGY SENV ENRG KSCA ETRD EAGR BR
    SUBJECT: THE ETHANOL DILEMMA - INADEDQUATE SUPPLY VS GROWING DEMAND

    ¶1.  Summary: As countries worldwide search for alternatives to
    increasingly expensive petroleum, not to mention green fuel
    alternatives that help meet Kyoto Protocol targets, Brazil finds
    itself in an enviable position.  The world's largest producer of
    both ethanol and sugar is the purveyor of technology, infrastructure
    and processes that could help fuel a biofuel revolution.  In fact,
    Brazil's ethanol program is so successful it has drawn the likes of
    Bill Gates and Google's founders, Sergey Brin and Larry Page, into
    the fray, promoting expanded ethanol production in the United
    States.   Yet, despite the monumental success of ethanol in Brazil,
    it is not happening without some growing pains.

    ¶2.  Brazil now finds itself in the unforeseen position of not having
    enough supply to satisfy demand. The unanticipated flex-fuel boom in
    Brazil coupled with increasing international demand for ethanol is
    exerting serious pressure on Brazil's domestic production apparatus.
     Sales of flex-fuel cars reached approximately 80% of new vehicle
    sales in 2005.  The resulting increase in demand for ethanol
    necessarily led to price increases.  Moreover, ethanol exports
    increased by 1.8 billion liters in 2005 (a 269% jump over 2004).
    This facet of increased demand is compounded by the fact that
    foreign importers are offering a price 8-10% higher than Brazil's
    internal market.  During the current interharvest period supplies
    are limited and prices have skyrocketed, leaving Brazilian consumers
    and officials with little hope for price reductions until production
    renews at the end of April.  Taken as an omen, one of the most
    pressing questions facing Brazil is how to create an infrastructure
    which can deal with the escalated demand for ethanol.
    End Summary

    ¶3. The question of how Brazil intends to address this supply and
    demand issue is still up for debate.  In conversations with Scioff,
    Angelo Bressan, Director of the Ministry of Agricultures
    sugar/alcohol division, noted that the GoB has only two ways to
    regulate ethanol.  The first involves adjusting the requisite amount
    of ethanol to be mixed in gasoline.  The GoB recently utilized this
    approach dropping the percentage from 25 to 20%. (reftel)  Although
    this measure increased supply, it had little to no effect on prices.
     A second option would be to regulate ethanol exports by, for
    example, linking exports to domestic stocks via a system of quotas,
    but leaving prices free.  This argument has been negatively received
    both by industry and free market advocates within the GoB.  Unica
    (the Sao Paulo Sugarcane Industry Association) believes that this
    mechanism would not be able to function without government
    interference in pricing.  Bressan noted that the GoB and industry
    have had an open dialogue focusing on how to address the problem of
    supply but without any decisive outcomes as of yet.

    ¶4. The sugar/alcohol industry, for its part, is looking to expand
    both the area of planted cane and the industry's capacity to refine
    it.  Preliminary estimates are that US$ 14 billion is going to be
    invested into refineries that can crush and produce sugar/alcohol by
    ¶2011.  Meanwhile, another US$ 7 billion is being invested into
    expanding cultivated land.  Bressan added that 11 new refineries are
    already under construction with an additional 16 planned for 2007.
    That said, the analgesic effects of these investments are still some
    years away.  Because it is not cost-effective to transport cane long
    distances, refineries and agricultural lands must remain in close
    proximity.  Once a distillery is completed, there will still be a
    12-15 month lag time (the crop cycle for cane) before production
    commences.  Moreover, the upward swoop of land prices in cane
    producing regions (49% over the last year, compared to the national
    average of 2%), is certain to become an obstacle to the expanding
    industry.

    ¶5.  This, of course, does not address the GoB's principal concern of
    how to maintain competitive prices for ethanol during the
    interharvest period.  Bressan has stated that the GoB and industry
    are discussing palliative measures but failed to expand on what they

    BRASILIA 00000788  002 OF 002

    were.  They are simply "discussing the issue."  The most prominent
    idea, reflected in numerous media accounts, is to create stockpiles
    of sufficient size to guarantee supply.  While the industry and
    government agree to the idea in concept, both sides dispute who
    should be responsible for creating mechanisms and supplying the
    necessary funding for the stocks.  While Roberto Rodrigues, Brazil's
    Minister of Agriculture, initially said that the government was
    studying inexpensive financing mechanisms for creating stocks, he
    later retracted those comments affirming that stocks are the
    responsibility of the productive chain.

    ¶6. In terms of Brazil and the United States, and the growing
    attention exhibited by parties like Gates, Brin and Page, and rising
    interest in California, Bressan noted that the Ministry would like
    to see U.S. tariff barriers dropped on combustible ethanol.  But, he
    stated, it needed to be done in a systematic fashion.  He fears that
    when the U.S. market opens, Brazilian consumers will be adversely
    affected by a dearth in supply resulting from profit hungry
    exporters.  Bressan further maintained that the GoB has an interest
    in creating a world market and that the U.S. and Brazil should work
    together to achieve that goal.  He added too, that countries,
    including the U.S., have a vested interest in working with Brazil
    because of the "know-how" they have regarding the production and
    processing of ethanol.

    ¶7.  A crucial link in this process, from his perspective, will be
    spreading the supply chain throughout the developing world,
    especially in Africa and Asia.  The U.S. and Brazil, he stated
    emphatically, are not capable of sustaining a world ethanol market
    on their own.  That, of course, has not stopped the likes of
    Petrobras from signing a contract in February to build a pipeline
    from Goias (one of Brazil's principal cane producing regions) down
    to Brazil's largest port in Santos.  A portent of how industry views
    the future role of ethanol.

    ¶8. Comment: In the short-term, it is clear that alcohol induced
    euphoria will continue the industry's ascension.  As the world's
    largest producer of sugar and alcohol, Brazil is taking measures to
    increase production and at least discussing how to satisfy supply in
    the boom time.  In response to the crisis over the last four months
    and the elevated prices, the GoB has recognized its impotence and is
    "throwing in the towel", waiting for the new harvest.  This is
    currently underway, and greater supplies of ethanol are expected in
    filling stations by early May. End Comment

    LINEHAN

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