Investing in Brazil with a Biofuel Focus Brazilian American Chamber of Commerce New York City May 4th, 2010 South America offers the most competitive conditions for food & renewable sustainable production South America Strengths Natural conditions Human & Technology Abundant water Cutting edge Technology Fertile soils Mechanization Mild temperature Management skills Land availability Environmental sensitiveness Economical Geopolitical Brazil and Argentina are Top Food & Renewable Exporters (sugar, ethanol, corn, soybean) Low production cost Private land Cheap land Food surplus Good infrastructure No trade barriers Vertical integration Corporate farming Good quality farmland is globally limited Source: Atlas of Global development, World Bank, 2008 2 Biofuel can be globally produced without decreasing land availability for crops The right crop in the right place: changing from grassland into sugarcane Millions of hectares (2007) BRAZIL 851.2 TOTAL ARABLE LAND 354.8 1. Total Crop Land 76.7 Soybean 20.6 Corn 14.0 Powercane 7.8 Powercane for ethanol Orange 1% 3.4 0.9 2. Pastures 172.3 3. Available area 105.8 Source: IBGE. Elaboration: UNICA. There is room for Cattle to strongly increase its efficiency (operational, crop productivity, feedlots) 3 Renewable energy and food can complementary be produced without affecting food supply High crop yields means higher biofuel production per unit of land Complementary production: ethanol + sugar + bioelectricity Yields (M3/hectare) Powercane (Brazil) Beet (EU) Powercane (India) Corn (USA) Cassava (Thailand) Wheat (EU) 0.0 2.0 4.0 6.0 8.0 Source: UNICA 10.0 Source: IEA ('05), Unica ('08) Bioelectricity's Strengths The higher crop productivity, the higher biofuel production and the better use of land Synergy with hydro production (dry season) Carbon Credit feasibility Use of straw could increase its potential 4 Powercane is the most efficient and clean feedstock for ethanol production Energy Balance Different Feedstocks Comparison CORN 9.30 Agricultural operations Transportation Inputs: fertilizers, consumables, seedlings, equipment Total agricultural production 2.71 GHG Emissions Reduction Energetic Balance (MJ/ha) 0.83 -30% -83% Processing Energy Inputs: chemicals, lubricants, heat & electric Equipment, buildings, facilities Total processing Corn Gasoline 1,083 2,897 4,012 4,107 10,849 14,829 9,988 18,107 - 31,055 1,976 33,031 1,653 379 2,032 Total energy consumption 47,860 20,139 Ethanol Co-products (WDG, Bagasse) Bioelectricity 92,253 36,803 - 165,863 15,154 7,129 129,056 188,146 81,196 2.7 16.4 168,007 9.3 54.9 Total energy production Powercane POWERCANE Energy Balance Energy Ratio Portable Fuel Ratio Source: IEA ('04), Unica ('08), Macedo, I ('04) More important than the Energy Balance (heat) is the Portable Fuel Balance! 5 Best Practices as No Till should be applied to achieve sustainable biofuel production No-till Benefits Improving water storage capacity Water storage capacity (in/8 in) Reduces erosion risk Increases organic matter Decreases use of pesticides Improves soil fertility Reduces CO2 emissions Higher and stable yields & lower costs year by year . Improves water efficiency 1.5 1.0 0.5 0.0 NO TILL TILL Decreasing pesticides usage Decreasing fossil fuel usage Carmen & Abolengo farms (Humid Pampas) 8,0 45 Spray/hectare Spray per hectare Liters per hectare 4,0 30 15 3,0 7,0 Liters/hectare 6,0 2,0 5,0 1,0 4,0 0 Convetional Tillage Liters per hectare 60 No Till - No-till increases land productivity and returns over time 3,0 2003-04 2004-05 2005-06 2006-07 2007-08 6 The convenient Generation 2.5 of biofuels is already on stage performed by efficient operations A NEW MODERN MILL PROJECT REQUIRES 8 YEARS TO ACHIEVE FULL CAPACITY (BIOLOGICAL PROCESSES) Sugarcane: Production & Area Evolution 60.0 5.0 Total Production (Tons) 4.5 4.0 K Hectares 50.0 40.0 3.5 Start Milling 3.0 30.0 20.0 2.5 2.0 Start Planting MM Tons Total area (hectares) 1.5 1.0 0.5 10.0 - Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Sugarcane = 75 tons 1 hectare of Sugarcane (1) Ethanol = 4.3 m3 Year 6 Year 7 Year 8 Need to integrate biofuels industry around the world Sugar = 4.1 tons Power (2) = 4.5 MWh (1) Includes replanting area; average of 7 years cycle; 60% ethanol – 40% sugar (2) Does not consider use of straw Infrastructure should be fixed and suited for biofuels 7 US gasoline production cost for refineries can be estimated as oil price x 1,05 What do US Consumers pay for on a Gallon of Regular Grade Gasoline? The US national average retail price of a gallon of regular gasoline in February 2010 was $2.64. There are four main components that make up the retail price of a gallon of gasoline: 10% Distribution & Marketing 6% Refining costs and profits – 6% of Gasoline price – 9% of oil price (estimation 5% costs & 4% profit) 15% Taxes: Federal, State, and local government taxes (not including county and local taxes) accounted for about 15% of the national average retail price of regular gasoline in February 2010. Federal excise taxes were 18.4 cents per gallon and State excise taxes averaged 22.01 cents per gallon. 69% $1,814 Crude Oil: The cost of crude oil as a share of the retail price varies over time and among regions of the country. In February 2010, refiners paid an average of about $77 per barrel of crude oil, which accounted for about 69% of the national average retail price of a gallon of regular grade gasoline. 1 Barrel = 42 Gallons $77 per barrel = 1,833 per Gallon Cost 1 gallon of crude oil -1,833 ≈ 1,814 - Cost of crude oil in 1 Gallon of Gasoline Cost of gasoline for refineries = Oil Cost ≈ Oil Price + Refining cost = 5 % of Oil Cost ≈ Oil Price x 1,05 Source: U.S. Energy Information Administration 8 US could increase ethanol % on gasoline without increasing gasoline price... …nor paying subsidies (if oil price is over USD 85 per barrel). It only has to eliminate Import Taxes on Brazilian Ethanol Brazilian Anhydrous Ethanol BRL / ton of cane Average cost of cane Production G&A Energy net Revenue Cash cost ex mill Freight Brazil 39,68 10,54 2,69 -6,59 46,32 BRL / M3 469,83 124,84 31,86 -78,01 548,52 140,00 USD / M3 USD/ Gallon USD/ Barrel 261,02 69,36 17,70 -43,34 304,73 77,78 39,63 422,14 142,10 0,988 0,263 0,067 -0,164 1,154 0,294 0,150 1,598 0,538 41,5 11,0 2,8 -6,9 48,4 12,4 6,3 67,1 22,6 Total cost without tax 564,23 2,136 89,7 US Import tax (1) Total cost without tax 211,34 775,57 0,800 2,936 33,6 123,3 without tax 89,706 4,272 85,43 with tax 123,306 5,872 117,43 Freight Santos NY Harbor Total cash cost Return on investment 10% Equivalent refined gasoline (USD / Barrel) Refining cost Equivalent oil (USD / Barrel) Assumptions Exchange rate Pol Yield of sugarcane Industry efficiency Liters per ton of sugarcane 1,8 14,50% 90 82% 84,45 Investment (USD / ton of sugarcane) Return (USD / ton of sugarcane) Return USD / M3 of ethanol 120 12 142,10 (1) US Import Tax fo r Brazilian Anhydrous Ethanol - US$ 0,54/Gallon + 25% of FOB value When blending 15-20% of ethanol, distilleries can still produce the other outputs from petroleum without significant changes 9 E20 and E30 ethanol blends outperformed gasoline in fuel economy tests (*) KEY FINDINGS 1. Ethanol’s energy content was not found to be a direct predictor of fuel economy. 2. E20 and E30 ethanol blends outperformed gasoline in fuel economy tests for certain autos. 3. Standard, non-flex-fuel vehicles operated well on ethanol blends beyond 10 percent. 4. Vehicle emissions met EPA requirements and were improved in key areas. (*) Source: “OPTIMAL ETHANOL BLEND-LEVEL INVESTIGATION” Researchers: The University of North Dakota Energy & Environmental Research Center (EERC) & the Minnesota Center for Automotive Research (MnCAR) Testing Method: The Highway Fuel Economy Test (HWFET), a test developed by the U.S. Environmental Protection Agency to determine fuel economy Vehicles Tested: Toyota Camry (2.4 liter engine), Ford Fusion (2.3 liter engine), non-flex-fuel Chevrolet Impala (3.5 liter engine), flexfuel Chevrolet Impala (3.5 liter engine) Fuels Tested: Various blends of undenatured ethanol & Tier 2 gasoline 10 Adecoagro is already producing food and renewable energy in Brazil Cotton, Soy & Corn La Pampa 13K HA 50K TONS Coffee 1K HA 3.5K TONS Ethanol, Sugar & Power Buenos Aires 49K HA 259K TONS Producing each commodity in the right location After careful due diligence of different regions, Mato Grosso do Sul was selected for expansion Location Research Analysis Analysis of different sites in Brazil Proper environmental conditions: Fertile Soils Climate Topography Room for growth: Few Neighboring mills Competition with other crops Underutilized pastures Property size: small or large? Logistics: Rail link to port? Regional terminal? Future link to pipelines? 12 Angelica, our first ethanol Greenfield, was built in 16 months and began milling during August 2008 Angelica Mill Cane reception Boiler Juice treatment and Fermentation Distillery and interconnections Cooling towers and Water treatment plant 13 Bahia offers excellent conditions to grow cotton, soy and corn, with high potential for land transformation Bahia’s Agro Ecological Features Sunshine: 800 Kcal/cm2/day Farms Industry Offices Rains distribution: 1,800mm and an extremely dry period Temperature: Annual mean 23ºC Bahia Soils are deep and well drained Even topography allows mechanization Skilled workers Vertical Integration Strategy Crop Rotation Scheme in Bahia Year 1 Year 2 Soy Corn Year 3 Cotton Year 4 Cotton Bahia produces high quality cotton at a very competitive cost Acquire ginning capacity Ginning process defines final product quality: Risk Management Reduce Disease Planting Flexibility staple length uniformity cotton purity Increase crop margins We have developed a team in Bahia qualified to execute our expansion plan 14 Our irrigated & fully mechanized coffee operation differentiates us from other players BAHIA’S OPTIMUM CONDITIONS FOR SPECIALTY COFFEE PRODUCTION No frosts 100% Irrigation 100% Mechanization Quality grains Stable Quality High Productivity Low cost Adjusted Technology Vertical Integration Processing facilities at farms 3rd Party Volume Trading Exports to Premium Markets International Certifications Adecoagro’s Coffee Highlights Quality Control No correlation with other crops Strong Client Relationship 1.3K hectares in production 63,500 bags estimated harvest 15 Thank You!