Brazil’s corn-ethanol boom is only starting. New projects are expected to almost double the biofuel’s production capacity in two years, leading the South American nation to face an oversupply that could reduce ethanol prices below gasoline parity for an extended period. That’s according to JP Morgan analysts, who mapped the new plants and their impacts on the biofuel, grains, and feed markets.
If all the 29 plants already authorized by the local regulator become operational in the next two years, 11.2 billion liters could be added to the industry’s capacity, more than doubling the current footprint. Such expansion would require an additional 27 million tons of corn, a volume that exceeds the current demand for crushing, estimated at 20 million tons.
Considering some of the new plants may not proceed, JP Morgan analysts considered as a base-case scenario that 7 billion tons of ethanol would be added, representing an expansion of 83% in the current capacity. Almost 17 million tons of corn would be needed to supply these plants, the analysts led by Lucas Ferreira said in a 50-page report.
That means corn-ethanol production could reach 15 billion liters, accounting for 37% of Brazil’s total ethanol output. Here’re the estimate’s assumptions: Brazil’s cane-ethanol production would remain steady at 27 billion liters (with no expansion in planted area), the anhydrous blend to the gasoline would rise to 30% from the current 27.5%, and the hydrous ethanol share in the fuel total market (except diesel and biodiesel) would grow by 1% per year through 2031.
On this scenario, Brazil would have a surplus of 3.1 billion liters of ethanol between 2025 and 2031. “Even in our low supply scenario, with several plants failing to succeed, we anticipate Brazil will face a 6% oversupply of ethanol between 2025-2031 on average,” JP Morgan analysts said.
With the additional crushing demand, corn could surpass soybeans as Brazil’s largest crop by 2030, according to JP Morgan. Brazil has a huge potential to increase the production of the grain by either increasing yields or planted area with no deforestation.
“Compared to the US average of nearly 12 tons, Brazil’s current corn yield of 6 tons per hectare offers ample room for growth,” the analysts said. Still, an average yield of 9 tons per hectare would be more realistic considering Brazil’s weather and soil conditions, they added.
The potential for boosting corn areas is also huge. Brazilian farmers plant 22 million hectares with corn —around 17 million tons in the second and third crops following soybean plantings in the summer. As Brazil’s soybean area totals 47 million hectares, almost 30 million hectares could potentially be integrated into the crop rotation system.
“Conservatively assuming only 50% of this area can support second-crop corn, and with a yield of 6 tons per hectare, Brazil could produce an additional 90 million tons of corn. This increase would be more than enough to meet the demands of upcoming corn ethanol plants, all without any deforestation.”
The production of DDG (Distillers Dried Grains) —a feed ingredient that is a byproduct of the biofuel, is seen almost doubling from the current 6 million tons to 11 million.
That’s good news for meat producers, especially cattle feedlots, favoring companies like Marfrig and Minerva, the bank said.
One of the industry’s key concerns is whether there will be enough biomass to fuel all those corn-ethanol plants. Most of the industries in Brazil rely on burning their own fuel to generate electricity in their boilers, which can burn different biomass from cotton seeds to eucalyptus, valued for its high calorific value.
Under JP Morgan’s base case scenario, the corn ethanol industry’s demand for woodchips would increase to 35 million cubic meters of woodchips from the current 19 million cubic meters. “This underscores the importance of securing a reliable biomass supply,” the analysts say.
