Record-setting oil prices are driving investments in Brazil's bustling sugar cane ethanol industry.
Record-setting oil prices are driving investments in Brazil's bustling sugar cane ethanol industry.
Private-equity investors in particular are leading the way by funding ventures to buy ethanol plants and sugar cane plantations.
The private-equity group within The Goldman Sachs Group Inc. of New York is among the backers of Brazilian Renewable Energy Co. Ltd., a São Paulo-based company that plans to have 10 ethanol mills running by 2015, as well as a pipe-line to transport ethanol to the port of Santos in that country.
In addition to deals backed by private-equity funds, London-based BP PLC this month agreed to pay $60 million for a stake in Tropical Bioenergia SA, an Edéia, Brazil-based sugar and ethanol joint -venture.
According to published reports, BP plans to invest more than $550 million in Brazil's ethanol industry, which would make the British oil giant's shares a de facto play on sugar cane ethanol.
As the trend evolves, financial advisers could start to see various forms of retail-investor access to Brazilian ethanol through mutual funds and publicly traded companies.
"I love the idea of investing in Brazil when I'm well-compensated for the risks," said Paul Sutherland, president of Financial and Investment Management Group Ltd., a Traverse City, Mich.-based mutual fund company that manages $700 million.
He said he is considering a trip to Brazil to meet with locals and "kick the bricks" in order to get a better understanding of the investment opportunities there.
A LONG ROAD
"Even if you're investing through a private-equity fund, you really have to do a look-through to show that the economics work," Mr. Sutherland said, noting that problems with squatters, environmentalists and local politicians may make the road to profits "very long."
Some of the risks of investing in Brazil have been tempered, according to the New York-based Standard & Poor's ratings service, which two weeks ago upgraded the nation's credit rating to investment-grade.
The announcement, which came two months after Brazil established itself as a net foreign creditor, could pave the way for advisers, mutual fund managers and pension funds to follow private equity into Latin America's largest country.
"The upgrade by S&P is very significant because it lowers the cost of capital. It will attract more-conservative institutional investors," Mr. Sutherland said.
Brazil's ethanol industry is appealing to outside investors because it represents a viable and proven alternative to corn-based ethanol, the increased production of which has been driving up commodities prices.
Over the past two years, foreign companies have acquired a dozen Brazilian ethanol plants.
"Since it's primarily a tropical plant, there is nothing as efficient as sugar cane to produce ethanol, which is why Brazil is probably the only country in the world that can produce enough ethanol to export," said Pedro Seraphim, a partner at the São Paulo-based law firm Tozzini Freire Advogados.
Last year, Brazil produced more than 5 billion gallons of ethanol, second only to the 6.5 billion gallons produced in the United States.
Combined, the two countries' output represents 90% of the world's ethanol produced for fuel.
A key distinction between corn ethanol produced in the United States and elsewhere, and Brazil's sugar cane ethanol, is the potential to increase volume without adversely affecting other commodities or food prices.
"The volumes we're producing right now are achieved with only 1% of Brazil's agricultural land, and we don't have the problem of the [sugar cane] crops' being a food staple," Mr. Seraphim said. "In the United States and Europe, where sugar cane is not a natural crop, they have to resort to other sugars to make ethanol."
Brazil's apparent advantage in ethanol production isn't due simply to its geographic good fortune; the country began moving to ethanol fuel during the energy crunch of the 1970s, and these days, 90% of the cars on Brazil's roads are capable of running on ethanol or on an ethanol-gasoline blend.
In fact, all "gasoline" sold in the country is a 25% ethanol blend, and most fuel stations offer a pure-ethanol pump so consumers can do their own blending based on current prices.
As of last week, the average price of a liter of blended gas in Brazil was $1.56 ($5.89 per gallon), while pure ethanol sold for 84 cents per liter, or $3.17 per gallon.
EXPORTING ETHANOL
Brazil is already exporting almost 15% of its annual ethanol production, but investors are focused on the potential, according to Mr. Seraphim. Only about 19 million acres of the country's 865 million acres of agricultural land are dedicated to sugar cane, he said.
And of the land devoted to sugar cane, only about half is used to produce ethanol.
"As an investor, you need a long-term stomach, because right now, sugar cane is being produced faster than demand," Mr. Seraphim said.
"Ethanol prices were low last year, and they're expected to be low again next year," he said. "And once it's planted, it doesn't make sense not to produce the ethanol, because the sugar cane must be harvested."
Even with the political and socio-economic risks, and the tariffs imposed on imported Brazilian ethanol by many countries, the math is starting to make sense for a growing number of investors.
"The big picture is that Brazil is not just able to produce sugar cane, but it is able to increase production," said Robert Levitt, president of Levitt Capital Management LLC in Boca Raton, Fla.
Mr. Levitt, who manages $500 million for clients and mostly works out an office in Paris, is planning a research trip to Brazil in August.
"We've been holding positions in Brazil for well over a year," he said.
"There are problems to watch out for, and the big issue is always getting clear land title down there. But it's a strong currency, and Brazil has everything going for it," Mr. Levitt said.
"They've got energy and land, and that's a pretty damn good start," he said.
E-mail Jeff Benjamin at jbenjamin@investmentnews.com.
