I just bought a truck—a Chevy S-10 with a Brazilian MWM diesel engine. So far the truck runs fine, and, with gasoline at $6 a gallon, I do cartwheels every time I fill the tank with diesel.
A producer friend of mine said I should have gotten a flex-fuel model that would burn ethanol or gasoline in whatever ratio I might want to put in. But those are four-cylinder jobs, and I just wanted more power than that.
As I was shopping around, we were going through one of Brazil's ever-more-frequent ethanol shortages. The administration was even making noises about lowering the minimum ethanol-gasoline blend from 20% to 18% as prices at the pump climbed and climbed. And climbed.
Ethanol's back down now, but the mid-term outlook isn't that good for prices. More and more flex-fuel cars on Brazilian roads has meant greater demand, while investments in cropping have gotten downright pokey, as the cash-strapped sugarcane producers have been laying off on investments in things like productivity and storage.
Brazil's recent tightening of the rules on foreigners owning farmland have probably pleased the patriotic, but have also aggravated the ethanol situation. Years ago, in a bid to help open the Brazilian economy to the world, and attract investors, a former administration opted to treat all Brazilian businesses the same—whether foreigners owned part of the Brazilian business or not.
As commodity prices rose with Chinese consumption and greater demand for biofuels, investors bought up land in Brazil. With a Brazilian partner owning at least one percent, a foreigner could set up a company in his or her home country, and a 99% foreign-owned subsidiary based in Brazil. That company, under the rules, was to be treated like any other Brazilian company, including in terms of the right to buy land.
But in a country with an active policy of redistributing farmland to those who don't have a farm, the sight of foreigners and foreign-controlled companies buying farmland got to be too much.
About two years ago, Brazil's land reform agency, INCRA, started launching trial balloon articles in the national media, which pointed out that the government doesn't even know how much Brazilian farmland is in foreign hands. The effort got the attention of former President Lula, at the end of his second term, who okayed a new interpretation of the rule that treats foreigners and foreign-controlled companies differently when it comes to land ownership.
Fair enough. But Brazilians are paying more at the pump for ethanol because the sugarcane industry hasn't been making the investments needed to increase production so as to keep up with a growing demand, which has been estimated to jump from 5.8 billion gallons today, to nearly 12.5 billion gallons by 2020. To do that, it's been estimated that $84 billion in such investments will be need in the next ten years.
But under the new interpretation of the land ownership regs, the country's National Agriculture Confederation estimates that some $9.9 billion in sugarcane sector investments planned by foreigners for the period to 2017 have been put on ice.
It's been said that foreigners are invested in up to 22% of Brazil's sugar-ethanol sector, and they could start looking elsewhere, to friendlier homes for their money, such as Thailand, Central America and Africa.
And so, with ethanol prices bouncing like a tennis ball, I wouldn't be surprised to see more diesel owners doing cartwheels at the gas station next time I go to fill up.