The Long Case for Sugar-Based Brazilian Ethanol Producer Cosan Limited

The long term bull case for sugar prices relates to global sugar-based ethanol use. Sugar is attractive in absolute terms as well as versus oil and corn prices on a 2 to 3 year view. It is also bullish for Brazil. The catalyst is a rising floor under the price of energy which increases "food for fuel" demand for sugar based ethanol. Although the world has greatly increased its share of sugar for energy use over the past 20 years, the levels of ethanol replacement in the US (1.5%) and the rest of the world (0.4%) is still greatly lagging that of Brazil (14.0%). Simply put, skyrocketing oil prices and growing concerns over climate change will boost global demand for renewable and cheap bio-energy, where Brazilian sugar has a 35-year track record of economic feasability.

Cosan Limited (CZZ) is the largest producer of sugar based bio-energy in the world and is the center of sugar based ethanol demand stemming from its integrated companies in Brazil in sugar production and bio-ethanol production. In October or 2007 the company raised $1.2 bn as an IPO on the NYSE.

Brazil has embraced sugarcane based ethanol and through CZZ it is the largest driver of global ethanol blending requirements. Moreover, the world demand for FFVs (flexible fuel vehicules) should keep CZZ in the forefront of world expansion based on its 30 year head start. the conversion rate per ton is 152 gallons ethanol per ton of Brazilian sugarcane which makes it the least expensive and most efficient alternative energy source. At present, sugarcane occupies just 0.6% of land area, but at least 12% of Brazil'e arable land could support sugarcane expansion. Brazil's massive arable land and low production costs ensures its leading position in the worldwide demand for sugar as an alternative fuel.

Brazil is responsible for about 20% of the world production and over 40% of the world's exports. Almost 80% of the total tonnage in lieu of delivery in the futures market at ICE is accounted for by Brazil. In year 2006 worldwide production of ethanol was 4.5 billion gallons compared with 12.7 billion gallons of consumed oil. Sugar based ethanol is attractive in absolute terms as well as versus oil and corn prices on a 2 to 3 year view. Wait for setbacks to accumulate sugar futures exposure, as well as CZZ and keep an eye on sugar/oil and sugar/corn spreads.

Disclosure: Long CZZ

Comments

[globalmacro]

Definitely fits within some nice themes.

2008 Apr 21 02:14 PM

[Tim Plaehn]

What kind of numbers do you look for in the sugar/oil and sugar/corn spreads?

2008 Apr 22 08:18 AM

[ack]

I am very bullish in the long term, but Cosan is being hurt by Petrobras keeping oil prices in the domestic market artificially low and the Brazilian Government threatening to increase tariffs. It even reported a loss in the last quarter for a company with a strong history of profitability.

There is a potential short-term catalyst of exporting to the USA since even with the $0.54 tariff, it may be competitive with corn ethanol given the current corn bushel prices. But unfortunately, Petrobras is vertically integrated in oil, and owns only distribution in ethanol, so it is actually hurting ethanol in favor of gasoline for its own profitability.

2008 Apr 22 10:49 AM

[User 185599]

I agree and think that czz has put all the pieces of the production/distributio... together and is the perfect takeover target bieing that it can do it all supply sugar produce ethanol and distribute it and if its not taken over it will be a tremendous company on its own...

2008 Apr 30 08:46 AM

[Bruce Pile]

If you look at a history of oil vs sugar price, you see no correlation before about 2001. With the oil price climb and resultant popularity of sugar ethanol, the R factor has grown to about 85!

If sugar has been taking just 0.6% of Brazil's land when 12% could support sugar expansion, then the increasing correlation between oil and sugar must not be very strongly influenced by land availability. Sugar prices have been controlled by other crop popularity and what not, latching onto whatever oil is doing instead. Sugar is at a huge, anomalous lag behind oil. It's one of those things, like silver, gold, and nat gas that follow the big moves in oil but haven't moved that much - yet. Of all the things that follow oil, sugar is by far the cheapest.

2008 Jul 12 04:44 PM