Agricultural and Food Policy, Resource /Energy Economics and Policy,

Schmitz, Andrew

Schmitz, Troy G.

Seale, James L., Jr.

English

Research Papers in Economics

  1
 
 
 
 
 
PBTC 02-6
 
ETHANOL FROM SUGAR:  THE CASE OF HIDDEN SUGAR 
SUBSIDIES IN BRAZIL 
 
By 
 
 
Andrew Schmitz, Troy G. Schmitz, and James L. Seale, Jr. 
 
PBTC 03-7                        July 2003 
POLICY BRIEF SERIES 
PBTC 03-7  2
INTERNATIONAL AGRICULTURAL TRADE AND POLICY CENTER 
 
MISSION AND SCOPE: The International Agricultural Trade and Policy Center 
(IATPC) was established in 1990 in the Food and Resource Economics Department 
(FRED) of the Institute of Food and Agricultural Sciences (IFAS) at the University of 
Florida. Its mission is to provide information, education, and research directed to 
immediate and long-term enhancement and sustainability of international trade and 
natural resource use. Its scope includes not only trade and related policy issues, but also 
agricultural, rural, resource, environmental, food, state, national and international 
policies, regulations, and issues that influence trade and development. 
 
OBJECTIVES: 
 
 The Center’s objectives are to: 
 
•  Serve as a university-wide focal point and resource base for research on 
international agricultural trade and trade policy issues 
•  Facilitate dissemination of agricultural trade related research results and 
publications 
•  Encourage interaction between researchers, business and industry groups, 
state and federal agencies, and policymakers in the examination and 
discussion of agricultural trade policy questions 
•  Provide support to initiatives that enable a better understanding of trade and 
policy issues that impact the competitiveness of Florida and southeastern 
agriculture specialty crops and livestock in the U.S. and international markets   3
EHTANOL FROM SUGAR:  THE CASE OF HIDDEN SUGAR 
SUBSIDIES IN BRAZIL 
 
Andrew Schmitz, Troy G. Schmitz, and James L. Seale, Jr. 
University of Florida, Gainesville, Florida 
Arizona State University, Mesa, Arizona 
University of Florida, Gainesville, Florida 
 
 
INTRODUCTION 
 
Brazil is the world’s largest producer of sugarcane, the world’s largest exporter of sugar, 
and the world’s third largest consumer of sugar.  Brazil produces sugarcane-refined sugar for 
human use as well as anhydrous and hydrous alcohol, which are used mainly as a blend when 
converting alcohol to domestically consumed gasoline.  Over 50 percent of Brazil’s sugarcane 
production is converted into fuel for automobile use. 
 
The Brazilian government affects Brazil’s sugarcane market through its alcohol fuel 
program.  The government sets the blend ratio for blending alcohol with gasoline.  At the FAO 
Conference in Africa in October 2002, one of the authors was repeatedly asked whether Brazil’s 
fuel policy provided a hidden subsidy to Brazilian sugarcane farmers (Schmitz, Seale, and 
Schmitz 2002).  The answer is yes.  Changes in the ethanol program and increasing blend ratios 
transfer more than 100 million dollars annually in the form of hidden subsidies.  However, the 
effects of these subsidies on world market prices are much different than in the case of price 
supports–deficiency payment type schemes.  In the case of Brazil, the fuel policy can result in an 
increase in world sugar prices, whereas prices would fall under alternative-type direct subsidies.  
Cases may exist where world prices decrease as a result of Brazil’s fuel policy even though 
sugarcane production increases and producer welfare increases.   
 
THE BRAZILIAN SUGAR-ALCOHOL INDUSTRY 
 
Brazilian sugarcane has three major uses: refined sugar, anhydrous alcohol, and hydrous 
alcohol.  Anhydrous alcohol is used as a blend with gasoline as mandated by the Brazilian 
government, and hydrous alcohol is used as fuel for vehicles that are powered 100 percent by 
alcohol.   
 
Part of the reason for the substantial increase in anhydrous alcohol production in Brazil is 
due to the phenomenal increase in the yield of ethanol from sugarcane.  In 1999, roughly 5,500 
liters were produced per hectare, whereas in 1975, per-hectare yield was only approximately 
2,000 liters (Figure 1).  This represents almost a three-fold increase in the efficiency of ethanol 
production per year.  Brazil placed import tariffs and export taxes on sugar to ensure that 
alcohol-production targets were met (Schmitz, Seale and Buzzanell, 2002).  The Brazilian 
National Alcohol Program (PROALCOOL) was created in 1975 in response to the 1973 oil crisis.  
Under this program, the Institute of Sugar and Alcohol (IAA) purchased anhydrous alcohol at an 
equivalency rate of 44 liters of alcohol per 60-kilogram bag of sugar while Petrobas, the state 
owned oil company, controlled ethanol distribution.  Credit guarantees and low fixed-interest-rate 
subsidies were also provided for the construction of distilleries and autonomous plants built 
adjacent to sugar mills. 
   4
Ethanol production is still regulated by government decree.  Each year, a Presidential 
Decree sets an alcohol-to-gasoline blend-ratio range for the percentage of ethanol that must be 
used in Brazilian gasoline.  
 
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
1
9
7
5
1
9
7
7
1
9
7
9
1
9
8
1
1
9
8
3
1
9
8
5
1
9
8
7
1
9
8
9
1
9
9
1
1
9
9
3
1
9
9
5
1
9
9
7
1
9
9
9
L
i
t
e
r
s
 
p
e
r
 
h
e
c
t
a
r
e
 
 
Figure 1.  Ethanol yield from sugarcane in Brazil, 1975–1999 
    (Schmitz, Seale, and Buzzanell, 2002).  
 
 
Both the domestic sugar and ethanol markets are protected from competition from other 
low-cost exporters.  A common external tariff of 20 percent on sugar imports and 30 percent on 
imports of ethanol was put in place in 2001.  
 
BLEND RATIOS AND BRAZILIAN SUGARCANE MARKETS 
 
The Brazilian government sets the portion of anhydrous alcohol that is used in gas-
powered vehicles.  This “blend ratio” is adjusted from time-to-time by government decree.  For 
example, the blend ratio was 25 percent in 1970 and then dropped to 11 percent by 1976; it 
increased to 22 percent in 1985, and then decreased to 13 percent by 1990; and it reached as high 
as 25 percent in June 2002, and then decreased to 20 percent in January 2003.   
 
Using the 1998 to 2001 three-year average as a benchmark, based on actual data 
regarding the blend ratio, supply, and demand over a range of plausible assumptions regarding the 
shape of the supply and demand curves, empirical results show that the three-year weighted 
weekly average of blend ratios from 1998 and 2001 was approximately 22 percent. 
 
  Based on the data, two sets of simulations were performed to obtain empirical results for 
the impact of a change in the blend ratio over a typical marketing year.  The first set simulated an 
increase in the blend ratio from 22 to 24 percent, reflecting what actually occurred at one point   5
during 2002.  The second set simulated a decrease in the blend ratio from 22 to 20 percent, 
reflecting what was announced in January 2003. 
 
 
Increase in the Blend Ratio 
 
The empirical results associated with an increase in the blend ratio from 22 to 24 percent 
are summarized below (Table 1).  The amount of cane used for anhydrous alcohol production 
rose by between 8.9 and 18.2 million metric tons (mmt), an increase of between 12 and 24.7 
percent.  
 
 
Table 1: Increase in blend ratio for anhydrous alcohol used in gasoline from 22% to 24%. 
Low Sensitivity Medium  Sensitivity High  Sensitivity 
 
Absolute 
Difference*
Percentage 
Difference 
Absolute 
Difference*
Percentage
Difference
Absolute 
Difference* 
Percentage
Difference
Cane Price Received by Farmers 
($/MT)  $0.31 3.2% $0.20 2.1% $0.12  1.3%
World Sugar Price ($/MT)  $2.30 1.3% $1.47 0.8%  $0.92  0.5%
Cane Used for Domestic Sugar 
(mmt)  -1.1 -1.6% -1.4 -2.1% -1.7  -2.6%
Cane Used for Anhydrous Alcohol 
(mmt) 8.9 12.0% 11.9 16.1%  18.2  24.7%
Cane Used for Hydrous Alcohol 
(mmt) -1.4 -1.6% -1.8 -2.1%  -2.3  -2.6%
Cane Exported as Sugar to ROW 
(mmt)  -1.7 -2.6% -2.6 -4.1% -6.6  -10.3%
Total Cane Consumption (mmt)  6.4 2.8% 8.7 3.8%  14.2  6.2%
Total Cane Production (mmt)  4.7 1.6% 6.1 2.1%  7.6  2.6%
Sugar Consumer Surplus  -$20 -3.2% -$13 -4.1%  -$8  -5.1%
Anhydrous Consumer Surplus  $180 25.5% $123 34.9%  $98  55.5%
Hydrous Consumer Surplus  -$27 -3.2% -$17 -4.1%  -$11  -5.1%
Aggregate Domestic Consumer 
Surplus  $133 6.0% $93 8.5% $79  14.4%
Domestic Producer Surplus  $91 4.2% $58 4.1%  $37  5.0%
Aggregate Domestic Welfare  $224 5.2% $151 6.0%  $116  9.1%
ROW Sugar Processor Surplus  -$20 -5.0% -$12 -8.0%  -$8  -19.4%
*Measures an increase in the blend ratio from 22 to 24 percent over the benchmark period (1998-2001). [All prices 
were converted to U.S. dollars for ease of comparison only; all welfare results are in millions of U.S. dollars. 
Low Sensitivity results use initial values of demand elasticity = -0.5, supply elasticity = 0.5, and excess demand 
elasticity = -2.0 
Medium Sensitivity Results use initial values of demand elasticity = -1.0, supply elasticity = 1.0, and excess demand 
elasticity = -5.0 
High Sensitivity Results use initial values of demand elasticity = -2.0, supply elasticity = 2.0, and excess demand 
elasticity = -20 
 
 
In addition, the surplus accruing to sugarcane producers increases from between $37 
million and $91 million (U.S. dollars) annually.  Finally, aggregate welfare in the Brazilian sugar 
sector increases between $116 million and $224 million (U.S. dollars).  Of course, this latter 
number does not include the losses accruing to crude-oil producers, crude-oil importers, etc.  On   6
the other hand, it does not include the gains accruing to Brazilian society in general, due to the 
fact that ethanol has been shown to be more environmentally friendly than gasoline made from 
crude oil.  In other words, Brazilian sugarcane producers would receive a subsidy of between $79 
million and $133 million (U.S. dollars) per year if the blend ratio for anhydrous alcohol used in 
gasoline were increased from 22 to 24 percent.  
 
Decrease in the Blend Ratio 
 
With a decrease in the ratio of anhydrous alcohol used in gasoline from 22 to 20 percent, 
the surplus accruing to sugarcane producers decreases by between $36 million and $90 million 
(U.S. dollars) annually (Table 2).  Finally, aggregate welfare in the Brazilian sugar sector 
decreases by between $93 million and $201 million (U.S. dollars) annually.  
 
 
Table 2: Decrease in blend ratio for anhydrous alcohol used in Gasoline from 22% to 20%. 
Low Sensitivity Medium  Sensitivity High  Sensitivity 
 
Absolute 
Difference*
Percentage 
Difference 
Absolute 
Difference*
Percentage 
Difference 
Absolute 
Difference* 
Percentage
Difference
Cane Price Received by Farmers 
($/MT) -$0.31 -3.2% -$0.20 -2.1%  -$0.12  -1.3%
World Sugar Price ($/MT)  -$2.30 -1.3% -$1.47 -0.8%  -$0.92  -0.5%
Cane Used for Domestic Sugar 
(mmt) 1.1 1.6% 1.4 2.1%  1.7  2.6%
Cane Used for Anhydrous Alcohol 
(mmt)  -8.9 -12.0% -11.9 -16.1% -18.2  -24.7%
Cane Used for Hydrous Alcohol 
(mmt)  1.4 1.6% 1.8 2.1% 2.3  2.6%
Cane Exported as Sugar to ROW 
(mmt)  1.7 2.6% 2.6 4.1% 6.6  10.3%
Total Cane Consumption (mmt)  -6.4 -2.8% -8.7 -3.8%  -14.2  -6.2%
Total Cane Production (mmt)  -4.7 -1.6% -6.1 -2.1%  -7.6  -2.6%
Sugar Consumer Surplus  $21 3.2% $13 4.2%  $8  5.2%
Anhydrous Consumer Surplus  -$160 -22.6% -$105 -29.7%  -$77  -43.3%
Hydrous Consumer Surplus  $28 3.2% $18 4.2%  $11  5.2%
Aggregate Domestic Consumer 
Surplus -$112 -5.1% -$74 -6.7%  -$57  -10.4%
Domestic Producer Surplus  -$90 -4.2% -$57 -4.0%  -$36  -4.9%
Aggregate Domestic Welfare  -$201 -4.6% -$131 -5.2%  -$93  -7.3%
ROW Sugar Processor Surplus  $20 5.2% $13 8.3%  $8  21.5%
*Measures a decrease in the blend ratio from 22 to 20 percent over the benchmark period (1998-20001). [All prices 
were converted to U.S. dollars for ease of comparison only; all welfare results are in millions of U.S. dollars.] 
Low Sensitivity Results use initial values of demand elasticity = -0.5, supply elasticity = 0.5, and excess demand 
elasticity = -2.0. 
Medium Sensitivity Results use initial values of demand elasticity = -1.0, supply elasticity = 1.0, and excess 
demand elasticity = -5.0. 
High Sensitivity Results use initial values of demand elasticity = -2.0, supply elasticity = 2.0, and excess demand 
elasticity = -20. 
 
   7
CONCLUSIONS 
 
Brazilian sugarcane producers receive indirect subsidies through Brazil's fuel-alcohol 
program.  If Brazilian sugarcane producers are risk neutral, an increase in the blend ratio from 22 
to 24 percent will raise the domestic price of sugarcane by between 1.3 and 3.2 percent.  Brazilian 
sugarcane producers would benefit from these price increases.  Brazilian producers would receive 
between $37 million and $91 million (U.S. dollars) annually in indirect sugarcane subsidies from 
an increase in the blend ratio.  Some advocates who promote the production and use of fuel 
alcohol in Brazil foresee the development of a substantial fuel-alcohol-export market. In 2002, 
only about 0.5 to 1.0 billion liters of ethanol were exported annually.  To help promote the trade 
globalization of ethanol, Brazil is providing information on the economics and technological 
aspects of ethanol production and trade worldwide.  
 
If Brazilian sugarcane producers are risk averse, there will be a supply response to 
Brazilian fuel policy.  In this case, the size of producer subsidies is larger than in the absence of 
risk aversion effects.  Specifically, if the Brazilian government dictates an increase in the 
alcohol/gas blend ratio, both the demand and supply curves for Brazilian sugarcane will shift 
outward to the right.  World sugar prices can fall due to an increase in the blend ratio making the 
Government policy trade distorting.  
 
REFERENCES 
 
FNP. 2002. Agrianual 2001 Anuario da Agricultura Brasileira. Sao Paulo, Brazil.  
 
JOB Economica. 2002. Weekly Sugar and Alcohol Report 4 (April). Sao Paulo, Brazil.  
 
Peter Buzzanell and Associates, Inc. 2000. The Brazilian Sugar and Alcohol Industry: 2000 and 
Beyond. Reston, VA (June).  
 
Just R., D. Hueth, and A. Schmitz. 1982. Applied Welfare for Economics and Public Policy. 
Upper Saddle River, NJ: Prentice Hall.  
 
Schmitz, Andrew, Troy G. Schmitz, and James L. Seale, Jr. 2002. Brazil as a dominant player in 
the world sweetener market: Do prices matter? FAO Third International Sugar Conference, 
Maputo, Mozambique (October).  
 
Schmitz, Troy G., James L. Seale, Jr., and Peter J. Buzzanell. 2002. Brazils domination of the 
world sugar market, in Sugar and related sweetener markets in the 21
st century: International 
implications, edited by Andrew Schmitz, Thomas Spreen, Charles B. Moss, and William 
Messina. Wallington, England: CABI Publishers.  
 
USDA (United States Department of Agriculture). Various years. Sugar and Sweetener Situation 
Outlook Yearbook. Market and Trade Economics Division, Economic Research Service, 
Washington, D.C.  
 
_____. 2001. Brazil sugar semi-annual report. Sao Paulo, Brazil: U.S. Agricultural Trade Office 
(October). 
 
 

Agrianual

Applied Welfare for Economics and Public Policy. Upper Saddle River,

Brazil as a dominant player in the world sweetener market: Do prices matter?

Brazils domination of the world sugar market, in Sugar and related sweetener markets in the 21 st century: International implications, edited by

States Department of Agriculture). Various years. Sugar and Sweetener Situation Outlook Yearbook. Market and Trade Economics Division, Economic Research Service,

The Brazilian Sugar and Alcohol Industry:

Ethanol from Sugar: The Case of Hidden Sugar Subsidies in Brazil

Ethanol from Sugar: The Case of Hidden Sugar Subsidies in Brazil

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics