One Reason To Invest In Cosan: Sugar's New Markets

Jan.15.12 | About: Cosan Limited (CZZ)

Cosan (NYSE:CZZ) stands as one of the largest sugar producers in one of the largest sugar-producing regions of the world. Cosan also thrives as one of the largest ethanol producers in a country that has geared about 50% of its entire sugar crop towards such energy production. Additionally, Cosan reigns as one of the largest sugarcane crushers in this very important crop.

Sugar will undoubtedly have a very important role in the future. Apart from its traditional role as a food sweetener, biofuel production is starting to show significant promise for the future of the industry. As advanced biofuel production capacity begins to come online, established ethanol markets, scaleable technology, and the promise of higher output yields should continue to make sugar a choice commodity as a production input.

Evidence of such a trend can be seen in Solazyme's (SZYM) relationship with Bunge (NYSE:BG). Bunge and Solazyme agreed in 2011 to a joint venture that would allow for the construction of a 100,000 metric ton facility that utilizes Solazyme's algae-based technology. Through the creation of this facility at a sugar cane mill in Brazil, Solazyme expects to create oils that can be used to explore a wide range products ranging from fuels to chemicals to cosmetics to food.

Cosan has been quick to adapt to the new markets that sugar can unlock. This can be seen through its recently formed partnerships. In 2010 Amyris (NASDAQ:AMRS) established a binding agreement to establish a joint venture with Cosan. Amyris boasts that by applying a synthetic biology platform to modify yeast, the joint venture will be able to create base oils from plant sugar sources which can in turn be used to produce renewable fuels, plastics, fragrances and lubricants.

Likewise, in 2011 Cosan partnered with Royal Dutch Shell (NYSE:RDS.A) to create a joint venture with Raízen which heralded a capacity for the production of 2 billion liters of ethanol annually. Raízen further signed an agreement with Codexis (NASDAQ:CDXS) to improve the performance economics of ethanol production.

With such agreements with Shell and Codexis, Cosan enhances it's reach into biofuel production, further diversifying its risk away from being a producer of just a mere commodity. The agreement with Amyris unlocks an additional possibility to find several additional revenue streams in markets otherwise unaffiliated with sugar production.

In terms of vertical integration of its budding ethanol prospects, Cosan also made a key acquisition of Exxon Mobil's distribution assets in Brazil back in 2008. This gives them a key comparative advantage against comparable producers like Adecoagro (NYSE:AGRO) or Sao Martinho. This acquisition gave Cosan access to a network of 1,700 gas stations across the country, a lubricants plant, and the usage rights of the Esso and Mobil brands. With this maneuver, Cosan fully integrated its operations into every stage of the ethanol production chain. It now had the ability to plant the sugar cane, distribute across the country, and sell to the end consumer.

With a long-term plan in place, Cosan is addressing the future stability of problems seen in the present. A recent article from Bloomberg notes that sugar output dropped 6.9% in Brazil this past crop season. Such fluctuations, dependent on weather, prevent the ideal consistency necessary for efficient capital allocation. Through the creation of additional markets, some of which have higher margins, compensating for volume or price inconsistencies can prove invaluable for a company operating on foresight. Cosan's future appears brighter than its past, and the company seems to be gearing up for prosperous years to come.

Disclosure: I am long SZYM, BG.