This study evaluates the economic viability of using corn to supplement sugarcane for ethanol production in Brazil. Volatility of input and output prices and their correlation due to the transmission of shocks across markets is considered in calculations of Net Present Value. Investment in a flexible mill (i.e. a mill that can process corn during the sugarcane off-season) is dominated by investment in a standard mill based on a second order stochastic dominance criterion. The latter suggests that risk-neutral and risk-averse investors may refrain from investing in a flexible plant. Downside risk associated with a flexible plant may be worsen by the US ethanol blend wall as this weakens the correlation between the price of corn and the price of inputs and outputs of the sugar complex. Reductions in capital import tariffs can offset this effect.
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While the term flex-mill suggests a plant switching between sugarcane and corn depending on market conditions, the term is normally used in Brazil in reference to sugarcane mills that can process corn during the sugarcane off-season.
The relative competitiveness of corn and sugarcane ethanol processes was also evaluated by . Technical assumptions used in that study are, however, somewhat dated.
It is worth noting that the fraction of sugarcane allocated to ethanol production may be somewhat sensitive to the price of ethanol relative to sugar. Time series of these variables for the last five years have been plotted in Appendix A. The correlation between both series is 0.3 revealing a link, though not a strong one, between prices.
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The coefficient of variation of FX’s NPV decreases by 46 % while the coefficient of variation of SU’s NPV decreases by 38 %.
The triangular specification was evaluated against other alternatives including the Beta, Normal, Log-normal, Frechet, Weibull, LogLogistic, Logistic, Pert, Exponential, Uniform, Gamma, Pareto, and Laplace.
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This study received support from Purdue University through its “Agricultural Research Program” and received support in the form of data and information from Companhia Mineira de Açúcar e Alcool; Minas Gerais Sugar and Alcohol Company and Syngenta.
Appendix A. Prices and Fraction of Sugarcane Allocated to Ethanol
The figure below reveals that, in the last 4 years, the fraction of sugarcane dedicated to ethanol production has generally increased jointly with the ratio of ethanol to sugar prices. This is to be expected as an increase in such price ratio is associated with increased profitability of sugarcane relative to ethanol. The fraction of sugarcane to ethanol has fluctuated between 47 and 54 %, while the price ratio has fluctuated between 0.022 and 0.03 in the last 4 years.
Sources: http://www.agricultura.gov.br/arq_editor/file/Desenvolvimento_Sustentavel/Agroenergia/estatisticas (quantities and prices of ethanol and sugar) and http://dfpd.nic.in/fcamin/dirsugar/report-300713.pdf (sugar recovery rate)
Appendix B. Cumulative Distribution Functions of Random Prices
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Iglesias, C., Sesmero, J.P. Economic Analysis of Supplementing Sugarcane with Corn for Ethanol Production in Brazil: A Case Study in Uberaba. Bioenerg. Res. 8, 627–643 (2015). https://doi.org/10.1007/s12155-014-9551-4
- Corn ethanol
- Flexible mills
- Correlated random prices
- Stochastic dominance