Brazilian ethanol: Too cheap to meter

Brazil's president, Lula, appears on Charlie Rose, and suggests rich countries should treat biofuel imports as "reparations"


Andrew Leonard
September 27, 2007 10:50PM (UTC)

Lula, a.k.a. Luiz Inacio Lula da Silva, the President of Brazil, dropped in on Charlie Rose Wednesday night. He had much to say on a wide variety of topics, ranging from the necessity for fresh blood on the U.N.'s Security Council and expanded membership in the "G-8" cabal of rich countries that coordinate global economic policy amongst themselves, to his own evolution from a resolutely left-wing radical metal-worker to a moderate consensus-seeking governing politician. But one can hardly utter the word "Brazil" these days without also saying "ethanol," so of course the conversation soon flowed towards what Lula called, several times, "the issue of building a new energy matrix in the fuel area."

Lula's got a problem. The price of Brazilian ethanol is plunging, down 35 percent since the beginning of the 2007-2008 sugarcane harvest, a victim of booming sugar and ethanol production in conjunction with the lack of a well-developed international market to soak up the surplus. Brazil's sugarcane crop has grown by an average of 8 percent a year since 2000, investment is pouring into the industry, new mills are popping up everywhere, but there's nowhere for the biofuel to go. As a result, in Brazil, gasoline prices are falling and inflation is down.

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In an energy-constrained world, this would seem to be a good problem, no? Cheap transportation fuel, and getting cheaper! With the price of a barrel of crude oil hovering over $80 and seemingly headed toward $100, Brazil's ability to flood the world with cheap ethanol would appear to be just what an energy-thirsty planet craves. The dilemma is also a nice demonstration that increased biofuel production doesn't automatically equate to boosted food prices.

But unfortunately for Brazil, the two markets which could conceivably be the biggest buyers for Brazilian ethanol, the United States and the European Union -- even as they mandate increased consumption of biofuels domestically -- protect their own indigenous suppliers of biofuels with hefty tariffs. Add in to the mix the fact that in the U.S., corn-based ethanol prices are also on the slide, even in the face of historically high corn prices, and there is absolutely no political chance that such protections will be lifted.

This annoys Lula. As he pointed out to Charlie Rose, with the help of an awkward translator:

I believe that it is a mistake to try to produce ethanol from corn. I believe it's a mistake. Why so? Because corn is the basic animal food for many animals that are being raised by human beings, and it could make it very expensive, the price of the corn for all the rest of the world. The corn prices could go up, and above all, it could make unfeasible the purchase of meat, because of the corn price, especially for those countries like Mexico and from Central America that eat a lot of tortillas. And so they're going to suffer the consequences.... And then, another important thing is that ethanol produced from sugarcane, it's cheaper than the ethanol that is produced from corn.

But economics aren't the only reason, argued Lula, for the world's rich countries to open their markets to Brazilian biofuels. There's also the matter of social justice. Lula sees biofuels as "an opportunity for us to have a reparation from the rich countries."

Developed countries could have these reparations with the less developed countries, the poorest countries of Africa, the Caribbean region, countries that did not have a good opportunity in the 20th century and that now could have a better opportunity in the 21st century. [Italics mine.]

In other words: You exploited the hell out of us for centuries, now it's time to compensate us for your imperial and colonial ravages, and start filling your cars with our biofuels.

The concept of biofuels as reparations is unlikely to make much headway with Iowan corn farmers, especially those involved in the ethanol business who are seeing their profit margins squeezed to almost nothing. In the short term, an ethanol bust looks increasingly likely, both in Brazil and the U.S.

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But in the long term, it's hard to see how a low price for ethanol will be an enduring problem. If oil and gasoline prices continue to rise, cheap ethanol will inevitably seep into the cracks of the global transportation matrix. If China, for example, finds that it can't afford to import oil and doesn't have enough land to produce the grains it needs to feed its people, what's to stop it, for example, from buying every gallon of ethanol Brazil can produce?


Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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Brazil Globalization How The World Works Latin America

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