Governments are promoting environmental policies, particularly those aimed at reducing the reliance on oil, but the debate continues as to whether biofuels are the answer. Anuszka Mogford looks at the industry and the growing ethanol futures market
Rising oil prices and increasing environmental policies
across the globe have led to a rising interest in energy
produced from agricultural crops. By far the leading biofuel is
ethanol and is produced from sugar in Brazil and from corn in
On the other side of the world, Bursa
Malaysia’s palm oil contract has created
controversy but is taking off and causing many in the West to
cast their eyes towards this smaller exchange. The US and
Brazil together account for 70% of the world’s
production and nearly 90% of ethanol used for fuel, with Brazil
pioneering its way forward.
Brazil takes the lead
As a result of the 1973 oil crisis, Brazil’s
government has been promoting ethanol as a fuel by providing a
number of important inducements for the ethanol industry. These
include guaranteed purchases by the state-owned oil company
Petrobras, low-interest loans for agroindustrial ethanol
companies, as well as fixed gasoline and ethanol prices where
hydrous ethanol is sold for 59% of the government-set gasoline
price at the pump.
In 2006 Brazil produced 16.3 billion litres, which
represents 33.3% of the world’s total ethanol
production and 42% of the world’s ethanol used as
fuel. Total production is predicted to reach at least 26.4
billion litres by the end of the year.
There are no longer any light vehicles in Brazil that run on
pure gasoline, reducing the amount of pollution from the
country’s cars. From the end of the 1970s the
government made it a mandatory requirement to blend 20% of
ethanol (E20) with gasoline, requiring just a minor adjustment
on regular gasoline motors. Today the mandatory blend is
allowed to vary nationwide between 20% to 25% ethanol (E25),
and it is used by all regular gasoline vehicles, plus three
million cars running on 100% anhydrous ethanol, and five
million dual or flexible-fuel vehicles.
Continuing to lead in ethanol production, Brazil Renewable
Energy Co (Brenco) plans on investing $1 billion to build a
1,100-kilometre, four million-litre-a-year ethanol pipeline
extending from Alto Taquari in Mato Grosso state to Santos, the
country’s largest port, in São Paulo state
on the country’s south Atlantic seaboard. Brenco
has also begun construction on its real sugar and ethanol mill
in Alto Taquari. The facility will process three million tonnes
of sugarcane and produce 275 million litres of ethanol by
The sheer scale of the industry in Brazil is impressive and
led to the launch of ethanol futures at the Brazilian
Mercantile & Futures Exchange (BM&F) in May 2007.
Volume figures have been steadily rising, with a dramatic peak
in November 2007 (see Figure 1).
At the time of launch BM&F’s chairman,
Manoel Felix Cintra Neto, hailed the environmental benefits of
the contract, saying: "What BM&F brings today to New York
is an important part of a win-win strategy. The launching of
BM&F’s ethanol contract may contribute to
global liquidity, by increasing the number of commodities
contracts traded, with a solid anchor in an
Eduardo Pereira de Carvalho, the president of União
da Agroindústria Canavieira de São Paulo,
Brazil’s union of mills, emphasizes that the new
contract is "essential" for the industry. "Producers are making
a $2.5 billion investment, but can’t hedge the
prices. Without this instrument we’re bare,
forming prices by looking into the rear-view mirror," he
Luiz Carlos Guedes, Brazil’s former minister of
agriculture, also stresses the importance of hedging in the
ethanol market. "There are risks in spite of the potential," he
Guedes adds that Brazil should seize the moment in order to
change its agricultural model. "We have to stop assessing
damage after it’s happened," he says, underlying
the fundamental role of risk management.
"BM&F’s role is vital for the development of
this new model for Brazil’s agricultural
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