Brazilian Sugar-based Ethanol Acquisition Targets

Implications: undefined A potential for consolidating sea-change in Brazilian sugar-based ethanol arena. Another opportunity for global ag-processors to extend their reach. undefined

Analysis:

Dow Jones published an article by Tony Danby entitled “Mergers, Acquisitions Loom Over Brazil Sugar, Ethanol Industry.” The facts are essentially accurate in my view. Having for years traveled to Brazil, I have seen the entrepreneurial skills of those who compete in the agriculture sector. For decades they did it against what would be considered insuperable odds, as the country was not well run until the current Lula Administration, and capital formation was an immense ongoing challenge.

Add to that, a still primitive infrastructure (roads, bridges, virtually no rail) in much of agricultural Brazil and heavily unionized shipping ports that continue to be antiquated, though improving … to a degree.



The long-present US import barriers to Brazilian ethanol, the strengthening of the $real and the rising cost of inputs have hurt ag producers and processors, especially in the capital-starved sugar-based ethanol sector. Providing another catalyst for non-domestic potential aggregators is the classic hyper-fragmented business model of the country’s ethanol entrepreneurs. Companies likely to take the opportunity to consolidate this industry are undoubtedly Archer Daniels Midland, Cargill and Bunge – all with significant operations in Brazil. The other major ag-processing player in the Brazilian arena is Corn Products International, Inc. The question is whether this firm will want to participate in sub-sectors they have historically shunned (sugar and ethanol), or watch as these other mega-processors move even further into their geography. European sugar companies are also potential acquisitors. In my view, these do NOT include historic major players, Associated British Foods or Tate & Lyle. However, Südzucker is among those who could consider casting an eye to the South and West of their home turf.