Brazil’s 4 billion-real ($2.1 billion) drive to revive sugar-cane production has faltered as government bureaucracy and a curb on foreign loans choked credit needed to finance planting.

Cane refiners, who also grow the crop, couldn’t complete paperwork in time to qualify for loans from the state development bank known as BNDES before the main planting season ended last month, said Maurilio Biagi Filho, president of the ethanol producer Grupo Maubisa. In March, the government imposed a tax on overseas borrowing to stifle capital inflows that are boosting the currency.

The shortage of credit dried up funds for replacing older sugar-cane stalks, which must be renewed every five years to maintain yields. At least eight of the nation’s 420 processing mills are idle because of a lack of cane, threatening Brazil’s lead over the U.S. as the biggest ethanol exporter. Brazil is the world’s largest sugar producer.

Brazil’s growers “need to plant but simply don’t have the financial resources,” said Alexandre Grendene Bartelle, who is seeking to tap a credit line from BNDES to expand fields around two sugar-cane facilities he co-owns. “Mills are in financial troubles. They need this line of credit.”

Brazilian growers replanted about 15 percent of their fields last year, less than the 17 percent annual replacement rate needed to maximize productivity, said Marcio Perin, an analyst at Informa Economics FNP, a consulting company in Sao Paulo. As much as 20 percent may be replanted this year.

Mills in the state were selling cane for 60.69 reais a metric ton at their gates in April, up 92 percent from an average of 31.55 reais in the 2008-2009 season.
Government Program

BNDES, formally named Banco Nacional de Desenvolvimento Economico e Social, introduced its lending program in January, the first effort by President Dilma Rousseff to revitalize the cane crop.

The goal is 1 million hectares of new or replacement cane plantations. That would underpin supplies to hundreds of processors, led by Cosan SA Industria & Comercio, which along with Royal Dutch Shell Plc (RDSA) is the world’s biggest operator.

The 72-month Prorenova loans are available through Dec. 31 and carry interest rates of about 9 percent -- a base rate of 7.8 percent plus a risk spread levied by the lender, said Alexandre Figliolino, regional director for Banco Itau BBA. That may be as much as 6 percentage points lower than similar loans from local commercial lenders, he said.

“These rates are very competitive,” Figliolino said in a telephone interview. “Everyone’s trying to access this credit.”
Satellite Images

Excessive paperwork has prevented growers from completing their applications, which are submitted to commercial banks and then forwarded to BNDES once the file is complete.

BNDES approved the first application yesterday, according to an e-mailed statement from the agency.

One daunting requirement for prospective borrowers is providing satellite imagery of mills’ existing cane supplies as well as detailed maps of the plantations. That can be a challenge for small farmers with lands deep in Brazil’s interior.

“BNDES operations are very bureaucratic and horrible,” Paulo Roberto Luccas, commercial manager for the cane processor Tonon Bioenergia SA, said by phone.

The government also has made it more expensive to borrow abroad. Brazil imposed a 6 percent tax in March on loans and bonds issued abroad by local companies as part of an effort to weaken the real and make domestic goods more competitive overseas, said Arnaldo Correa, president of Sao Paulo-based Archer Consulting.
Tax on Loans

Known as the IOF tax, the duty on foreign borrowing was extended to loans and bonds with durations of as long as five years. Previously, it covered three-year deals.

The tax jeopardizes a widely used practice where cane companies sell their sugar before it’s produced and use futures contracts as collateral for dollar-denominated loans that cover replanting costs, Correa said. As much as 60 percent of Brazil’s cane producers finance crops this way, he said.

Those loans are often provided by lenders outside Brazil that are now subject to the IOF tax. Sugar producers prefer to borrow in dollars because they sell in the same currency.

Extending the IOF tax “is going to hurt our sugar- producing clients who have been accessing these three- to five- year credit lines,” Alastair Gourlay, a senior associate at the London-based international law firm Clifford Chance LLP, said in an e-mail.
Replacing Plants

Sugar-cane plants in Brazil are typically replaced every five years, and many are past their peak-production age, said Bartelle.

Sugar-cane stalks are cut near the base when harvested so they will regrow during the next season. The plants must eventually be replaced to maintain yield, at a cost of about 4,000 reais a hectare (2.5 acres), Jose Carlos Hausknecht, director of Sao Paulo-based agricultural consulting company MB Agro, said in a telephone interview.

The average age of Brazil’s cane plants in 2011 was about 3 1/2 years, a year older than optimum, Hausknecht said.

BNDES is considering easing the requirements for the Prorenova program. The agency is scheduled to meet with commercial banks this month to discuss revising the application process, said Antonio de Padua Rodrigues, technical director for the sugar-cane trade group Unica.

“The degree of success of the line depends on the changes it makes in May,” he said in a telephone interview.

Reduced investments in crops mean “the U.S. could overtake Brazil this year” as the world’s biggest ethanol exporter, Hausknecht said.

Brazil was usurped by the U.S. as the world’s largest ethanol producer in 2006, and it almost ceded its place last year as the top exporter. The country exported 1.9 billion liters (500 million gallons) of ethanol in 2011 and imported 1.2 billion liters, mostly from the U.S., Morsy said.

The country exported 5.1 billion liters in 2008 and imported about 500,000 liters, Morsy said. Maintaining that rate of production requires more flexible forms of finance for the industry, said Filho, the executive at Grupo Maubisa.

“This credit is very much in demand,” he said.

source: bloomberg


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