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The Money Flying Down To Brazil


Philippe Reichstul knew there was money to be made in ethanol. But the former president of Brazil's state oil company, Petrobras (PBR), also realized he needed deep-pocketed investors to make a mark in the fast-growing biofuels field. So when he heard last year that AOL (TWX) co-founder Steve Case was interested in a small venture to produce sugarcane ethanol, Reichstul was eager to get in touch. But forget about anything pint-sized. "It had to be something large," Reichstul says.

These days, lots of A-list investors see potential for big profits in Brazil's sugarcane fields. Private equity, agribusiness, and well-heeled entrepreneurs are trying to cash in on the country's ethanol. A pioneer in the industry since the 1970s, Brazil is the world's top ethanol exporter and second only to the U.S. as a producer. Nearly all cars in Brazil run on ethanol or an ethanol-gasoline mix, and the country's sugarcane-based fuel is 30% cheaper to make than the U.S. corn-based variety.

All good reasons why Reichstul was able to attract serious money. In addition to Case, he enlisted green-fuel advocate and Sun Microsystems (SUNW) co-founder Vinod Khosla, supermarket magnate Ron Burkle, film producer Steve Bing, and former World Bank President James D. Wolfensohn to create Brazilian Renewable Energy Co., or Brenco. The Americans put a total of $31 million into the company, while Brazilians invested $20 million. In March, the group raised nearly $150 million more from U.S. and European investors. Brenco plans to spend $2.2 billion to plant 1.5 million acres of sugarcane, build 10 ethanol mills, and churn out 1 billion gallons a year by 2014, largely for export. Reichstul says he aims to "unlock demand" for the fuel across Europe, Asia, and the U.S.

It's a long-term investment, with plenty of risk. Brenco won't start producing until 2009, and the company says it will have to raise a further $1.5 billion in loans and private capital to finance its buildup. Meanwhile, costs are rising: Land prices in Brazil's sugarcane- growing heartland have more than doubled since last year. And no one knows whether ethanol will remain profitable. In most countries, consumers won't buy the fuel without government subsidies--and Brazilian ethanol faces stiff tariffs in the U.S. and Europe. Even in Brazil, where ethanol isn't subsidized, producers could lose out if oil prices fall below $40 per barrel, which might spur consumers to switch to a cheaper mix. Currently, pure ethanol sells for $2.80 a gallon at the pump in Brazil, vs. $5.00 for a gasoline formula that is about one-fourth ethanol.

BETTING BILLIONS

A host of investors seem to think Brazil's ethanol bet is worth it. On June 3, billionaire George Soros visited a Brazilian ethanol mill owned by Buenos Aires food and energy group Adecoagro. Soros is the leading shareholder in the company, which plans to invest $1 billion in four more Brazilian fuel projects by 2015. "We expect the returns to be highly attractive," says Adecoagro President Alan Boyce. In March, private equity firms Carlyle Group and Riverstone Holdings raised $240 million to fund Brazilian partners operating four ethanol mills. "We think ethanol will be a permanent part of the [global] fuel mix," says Riverstone Managing Director Michael B. Hoffman.

With all the money pouring in, Brazil's ethanol capacity is picking up fast. By 2010, at least 77 new ethanol plants are expected to begin operation, boosting output by a third, to almost 7 billion gallons a year, says the Agriculture Ministry. Major producers such as Brenco will have to find export markets or face the price volatility that could come with a domestic glut. Still, if there's a shakeout, the biggest players will probably survive. "We aren't saying: 'Let's do biofuels at any price," says Arnaldo Vieira de Carvalho, an energy specialist at the Inter-American Development Bank. "But in Brazil there's already proof they work."

By Joshua Schneyer


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