Brazil’s sugar industry propped up by government largesse

April 18, 2013

by Rene Pastor

To many people, Brazil’s image in the sugar and ethanol market is that of low-cost operators who used their smarts and free-market philosophies to become a top producer and exporter in the world.
That, it seems, is largely spin.
The reality is that Brazil’s government is subsidizing its producers, while simultaneously criticizing the United States and other countries for their agricultural policies.  And Brazil’s subsidies have a profound impact on global prices because of its market share.
“The immense power of Brazil’s sugar industry is founded upon many years of strong government intervention,” said a study by Patrick Chatenay, the president of ProSunergy in the U.K. The company provides investment, mergers and acquisition advisory services for the global sugar and ethanol industry.
“The government policies that built this magnificent and powerful industry date back to the 1970s,” explained Chatenay.  “Today still, the industry benefits from at least US$2.5 billion per year of direct and indirect government incentives.”
And actual subsidization amounts could be much higher than $2.5 billion because of unreported debt restructuring, he noted.
Here’s how Chatenay explained the web of intricate government policies, which also include direct subsidy payments to some sugar growers:
“Government transfers the cost of pension liabilities from farmers to other economic agents, provides soft loans to agriculture, forgives and reschedules agricultural debts, forgives and reschedules tax debts at very favorable terms, makes possible arbitrage between sugar and ethanol markets, mandates blending of anhydrous ethanol into gasoline, encourages the sale of hydrous ethanol, and has been the source of immense economies of scale by making possible the doubling of the industry’s size.”
U.S. sugar industry officials have long advocated for a world market free of government intervention and have pushed for a “zero-for-zero” strategy where the U.S. would eliminate its sugar policy if other sugar producers like Brazil do the same.
Jack Roney, director of economics and policy analysis for the American Sugar Alliance, said U.S. producers would fare well under such a scenario because of their efficiency.  But he doubts Brazil would be interested in a cease-fire since its direct and indirect policies have built an empire that today controls roughly half of global sugar exports.
To put Brazil’s 50 percent export market share into perspective, Roney explained that Saudi Arabia only controls 19 percent of global crude oil exports.
The economics of Brazil’s sugar and ethanol industries, both of which derive from sugarcane production, must be viewed together.  Chatenay said that aside from churning out 34 million metric tons of the sweetener, Brazil also produces 5.8 billion gallons of the biofuel ethanol.
“The ethanol market is a creation of the (Brazilian) government, and the current enterprise value of the assets developed thanks to government intervention can be estimated at some US$45 billion,” he said.  “These assets also provide a major benefit to Brazil’s sugar producers.”
The ethanol market guarantees the sugar industry an outlet if the producers do not like sugar prices, which, according to Chatenay is another powerful, hidden subsidy.
As for the gasoline market in Brazil, the market is largely controlled by Petrobras, a monopoly where the Brazilian federal government owns more than 50 percent of its voting common stock.
Sugar and ethanol subsidies are sizeable, but other crops benefit from Brazilian intervention, too.
Brazil’s 2012/13 federal budget for agriculture amounts to US$68 billion, 85 percent of which is to be paid out as loans. Chatenay’s report said “the combination of subsidized interest rates, soft lending terms, debt forgiveness and rescheduling as currently practiced means that a large portion of those credits should rightly be considered a subsidy.”
Unfortunately for its competitors, most of Brazil’s subsidies have gone unnoticed due to poor data reporting, the non-transparent nature of its subsidy programs and a self-designated status as a developing nation in the World Trade Organization that helps Brazil escape reform.
“We can compete with anyone on a level playing field,” Jack Roney concluded on a recent call with reporters where he stressed the importance of continuing America’s sugar policy.  “But disarming unilaterally would only benefit heavily subsidized competitors and leave Americans dependent on foreign countries for an essential food staple.”