PECEGE.CNA Sugarcane 2010.11 season results release

Sugarcane, sugar and ethanol production costs in Brazil:

Monitoring 2010/2011 crop year – Center-South

Programa de Educação Continuada em Economia e Gestão de Empresas “Luiz de Queiroz” College of Agriculture of the University of Sao Paulo

Av. Pádua Dias, 11, P.O. Box 252, CEP 13400-970, Piracicaba – SP – Brazil Phone (19) 3375-4250 – [email protected] – www.pecege.esalq.usp.br

PECEGE/CNA release new research of Sugarcane, sugar and ethanol production costs in Brazil: monitoring the 2010/2011 crop-year – Center-South

The Continuing Education Program in Economics and Business Administration – PECEGE, a research group of the "Luiz de Queiroz" College of Agriculture (ESALQ) of University of São Paulo, with support from the Agriculture and Livestock Confederation of Brazil - CNA announces the final report of the costs of production of sugarcane, sugar and ethanol, monitoring of the 2010/11 crop in the Center-South region. These reports of costs of production of sugarcane, sugar and ethanol in Brazil have been conducted for four crops and assume the task of developing a research that enables the creation and dissemination of information into society, looking for the development of companies of this sector.

Initiated to analyze the 2007/2008 crop, the series of surveys originally aimed to calculate the regional indicators of sugarcane, sugar and ethanol production costs for the main Brazilian regions. New aims were added in the others reports: i) definition of a cost accounting methodology common to all research participants, ii) development of performance indicators of technical processes and, iii) creation of indicators of prices paid by a group of agribusiness production inputs in the sugar-ethanol industry.

The survey has the essential contribution of nearly one hundred institutions, including mills, associations, sugarcane farmers, unions, associations, equipment manufacturers, research centers, input suppliers and lenders receiving as consideration of technical, and comparative information on economic conditions for its management costs, prices of inputs and production processes.

Costs of the 2010/2011 crop in the Center-South region

The costs of the 2010/2011 crop has set the estimate cost for final harvest by players in the region called ‘Traditional”, bounded by the states of SP, PR, RJ, and ‘Expansion’ region, referring to states of GO, MG, MS and western Brazilian region. The research involved the collaboration of 65 institutions, with 55 mills and 10 associations of sugarcane farmers and, in addition to that, it had the support of information published or made available by CTC, Orplana, UDOP and UNICA. The survey sample was responsible for production and processing of 116 million tons of sugarcane, or the equivalent of 21% of the total amount produced in South-Central region. The 2010/11 crop compared to previous crops was characterized by higher farm costs, decreased crop yields, raw material with high quality, increased manufacturing costs, improvement of the income coefficients and losses from industrial processes and sugarcane prices, sugar and ethanol are more favorable to producers and processors. High prices were a major driver of improved profitability. The survey results highlighted that, on average, the sugarcane farmers in the ‘Expansion’ region have achieved a sufficient price to cover all factors of production. While ‘Traditional’ region’s farmers had enough prices to pay for their costs with cash flow and depreciation, but failed to pay their opportunity costs of capital and achieving economic profitability. Since the cost of cane produced by mills itself, in both regions, were lower than those of farmers and market prices. Overall, there was a noticeable improvement in earnings in the sector in the current crop compared to previous ones, due to good market conditions for sugar and ethanol, since the costs of production have slightly increased. Table 1 outlines the summary of the total economics cost of the 2010/2011 sugarcane crop. Table 2

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The economic results obtained by the production of sugar and ethanol did not differ from those of sugarcane. It was identified that both the market prices of ethanol and sugar market were sufficient to pay the total industrial costs (TC) in the two regions analyzed, except hydrated ethanol produced in the ‘Traditional’ region, which only covered a portion of the cost of opportunity cost of capital. Although both have shown good performance, should be highlighted the best performance of the sugar market, which once again outperformed the market for ethanol. Table 3 presents the summary results of the major products, VHP sugar and hydrous ethanol.

Table 3 – Results of production costs and contribution margin of VHP (unit cost R$/ton) sugar and ethanol (unit cost R$/m³) at the 2010/11 crop.

Product Region Operational Cost (TOC)

Economic Cost (TC) Economic Margin

VHP Sugar Expansion 505,09 589,10 23,9% VHP Sugar Traditional 549,27 631,87 15,5% Hydrous Ethanol Expansion 757,63 874,19 1,9% Hydrous Ethanol Traditional 803,82 916,30 -2,8% Source: PECEGE (2011)

The maintenance of good profitability in the sector was caused by the improvement in prices, combined with increased manufacturing productivity, which occurred mainly due to higher concentration of sugar in the raw material. However, improvements in efficiency of use of agribusiness production factors have not been identified as well as their prices have suffered following the inflation adjustments. This diagnosis confirms the interpretation that is extracted in the last harvest, which confirms that the performance of the sector is heavily dependent on market prices for sugar and ethanol. A continuous search for cost control is needed, in its constant search for improvement of the production system, ensuring the sustainable development of the sugar-energy activity. Figures 2-4 highlight trends in key costs indicators measured in this survey, developed by PECEGE / CNA.

Figure 2 – Evolution costs (TOC, TC) and average price for cane farmers of Center-South

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Figure 3 – Evolution costs (TOC, TC) and VHP sugar average price – Center-South

Figure 4 – Evolution costs (TOC, TC) for hydrous ethanol in the Center-South.

The regular publication in production costs of sugarcane, sugar and ethanol increases the seriousness and credibility of this work with stakeholders in the sector, which is reflected in the increased number of participants. We highlight the role of this study to disseminate methods of cost estimates that could serve as a reference for identifying, analyzing and comparing the practices of agribusiness to show factors in the production cost and generate indicators that reflect the best practices management and production control.

This paper presents the survey developed by PECEGE/CNA and invites those interested to contribute with our research. The full reports with results from the four crops analyzed in the recent years are freely accessible to the public and are available at www.pecege.esalq.usp.br. For extra information please contact [email protected] or phone + 55 (19) 3375-4250. All study participants have exclusive access to a benchmarking report and analysis on your business. In April 2011, the survey starts PECEGE consolidation of the production costs of the Center-South and Northeast in the 2010/11, and once again hopes to have the contribution of sugar and bioenergy sector institutions.

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PECEGE.CNA Sugarcane 2010.11 season results release