Corn ethanol could require R$14bn in eucalyptus investment
Planting eucalyptus to meet the energy supply needs exclusively of Mato Grosso’s corn ethanol plants could require investments of between R$7.6 billion and R$14.3 billion over the coming years. The estimate comes from Itaú BBA, which made its projections on the assumption that the biofuel industry will not be able to rely on biomass other than eucalyptus on a large scale to fuel its boilers and operate its plants.
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In a conservative scenario, in which biomass-fired cogeneration units have low efficiency, the corn ethanol production expected in the state by 2030, at 12 billion liters, would consume approximately 82,000 hectares of eucalyptus forest each year.
Because eucalyptus takes seven years to reach its first maturity cycle for harvesting, 572,000 hectares would need to be planted with eucalyptus in Mato Grosso by 2028. However, by the end of last year, the state had 165,000 hectares planted with the species, according to a survey by the Mato Grosso Institute of Agricultural Economics (Imea). To make up the difference, the investment needed to establish the entire required forest would reach R$14.3 billion.
To arrive at this figure, Itaú BBA considered an average cost of R$35,000 per hectare over a 13-year period. This amount includes planting costs in the first year and maintenance costs in subsequent years, including one harvest when the trees reach seven years of age and a second harvest six years later.
In a scenario in which cogeneration plants have an average level of energy efficiency, which the bank considers its base case, biomass requirements would be lower. As a result, the eucalyptus area needed to supply the state’s corn ethanol industry through 2030 would be 440,000 hectares, with annual harvesting of 63,000 hectares. Reaching this forest area would require R$9.6 billion in investment over the coming years.
In a scenario in which all capacity expansion occurs through highly efficient cogeneration plants, which generate more energy with less biomass, the required investment would be R$7.6 billion. These investments, however, should only take place if the state actually implements the rules set out in an agreement signed with the state Public Prosecutor’s Office in June, which provides for ending the use of native forest biomass by high-intensity agroindustrial operations by 2035.
If all of Mato Grosso’s corn ethanol plants, with combined installed capacity of 8 billion liters a year, were already using only eucalyptus biomass today, 383,000 hectares would need to be planted with the tree, with annual harvesting of 37,000 hectares.
In other words, the eucalyptus area needed to supply only the corn ethanol plants currently in operation is already more than twice the area actually planted with the species across the state. According to the Public Prosecutor’s Office and experts, the gap has been filled through the clearing of native vegetation.
“A lot of the eucalyptus the industry will need is because it will no longer be able to consume wood from forest clearing. If [the clearing of native vegetation] continues to be allowed, the potential for eucalyptus expansion will be lower,” says César Castro Alves, agribusiness consulting manager at Itaú BBA. In his view, using wood from deforestation to fuel the boilers of corn ethanol plants “detracts from maintaining the good carbon status of Brazilian corn ethanol.”
The capital requirements to meet the needs of the corn ethanol industry are not trivial, particularly considering that there are currently no financing lines at scale to meet the crop’s needs.
The economist notes that several variables can affect the amount of capital needed to finance eucalyptus, such as agricultural productivity. In the low-efficiency scenario, Itaú BBA assumed an average yield of 30 cubic meters of wood per hectare, but lower figures can be seen in practice, of as little as 15 cubic meters per hectare, or higher figures, of 40 cubic meters per hectare. According to Alves, this significantly changes the calculations for each project.
Investment decisions on eucalyptus plantations currently depend on wood prices, which have surged in recent years, and the Selic benchmark interest rate, which is also at a historically high level. In the bank’s projections, an investment in eucalyptus cultivation today, with the current price of wood near R$150 per cubic meter, can achieve a return equivalent to 30 bags of soybeans per hectare, or an internal rate of return of 17%—above the Selic’s minimum return of 14%.
According to Alves, plantations are likely to become more attractive to producers the closer they are to an ethanol plant. “If [the eucalyptus] is too far away, the plant pays less for the wood,” he explains.
