Brasília – From January 2007 to June this year, Brazil has received over US$ 3.5 billion in foreign direct investment for production of oil products and biofuels. According to the Central Bank, most of the funds (US$ 3.1 billion, 90% of the total) were turned to investment in the ethanol industry.
Since the middle of this decade, foreigners have been investing in the construction of mills and purchase of industries for the production of ethanol as well as buying land for the growing of sugarcane.
According to professor Míriam Piedade Bacchi, a researcher at the Centre for Advanced Studies in Applied Economics at the College of Agriculture (Esalq), this took place at a moment of euphoria, of high prices for the sector. "This directly attracted foreign capital for investment in mills or part of mills or through funds that are also shareholders of some mills."
The lack of credit caused by the global financial crisis boosted the internationalisation tendency, said José Ricardo Severo, technical advisor at the National Confederation of Agriculture and Livestock (CNA). Severo said that 50 mills, in a universe of 417 units, are in negotiation for sale to foreigners. The foreign participation in the sector grew between 5% and 13% over the last five years.
"Many companies, due to lack of turning capital, funds and financing, are selling alcohol at low prices. This is becoming a snowball, with industries entering a debt circuit. There should come a moment in which they will have no capital and in which operation will become impossible. Those who currently have money are international companies," said Severo. He pointed out that foreign capital prefers to buy mills to investing in the assembly of new units.
Severo considers the capital inflow to be a positive factor, but fears that the foreign presence might harm the national competitiveness. The internationalisation process is related to the concentration of the sector, says the advisor to the CNA. Foreign groups such as Bunge, Cargil, Dreiffus, ADM and Geres are buying Brazilian plants facing credit problems.
“The plants that are doing well are purchasing others, and those that are broke will either be sold or go bankrupt,” says the former minister of Agriculture Roberto Rodrigues, who presides over the Agribusiness Board at the Federation of Industries of the State of São Paulo (Fiesp).
The Press and Communication director of the Brazilian Workers Central (CTB), Carlos Rogério de Carvalho Nune, explains that the concentration of the sugar and alcohol sector is “historical”. Nunes claimed that he fears that market concentration may lead to a reduction in the number of jobs, due to heavier use of machinery, and drive small farmers out of the business, as they are unable to compete with the large-scale industry.
“Scale is a determining factor for income. The small ethanol industry is not as profitable as the large industry,” says Rodrigues. However, the former minister stated that “significant technological improvements are taking place, allowing for progress in the distilleries sector, which is increasingly profitable to small farmers, who may organise themselves in cooperatives.”
The professor Míriam Bacchi points out the pros and cons of the market concentration process: “On the one hand, [the process] may lead to cost reduction with the economy of scale and economy of scope [unified management]. On the other hand, the concentration may increase the market power and lead to higher prices.” She does not believe that internationalisation will directly benefit what she called the "commoditization" of ethanol in the foreign market, but to her, the foreign capital inflow is favourable to the sector’s expansion. Commodities are products traded on stock exchanges.
*Translated by Mark Ament and Gabriel Pomerancblum
