Brazil is the world’s largest producer of ethanol, which the country’s producers make from sugar cane stalks. The bad news is that lower petroleum prices have cut demand for ethanol and nearly 20% of the country’s producers face bankruptcy or severe financial trouble as a result.
The country’s largest producer is Raizen, a joint venture between Cosan Ltd. (NYSE: CZZ) and Royal Dutch Shell PLC (NYSE: RDS-A). A company executive has told the Financial Times that the government plans to reduce the tax on ethanol by nearly 80% in a move to help prop up the industry. A back-of-the-envelope calculation yields a cut from the current tax of about $0.30 a gallon to around $0.06 per gallon.
The government will not eliminate the tax completely for fear of stoking inflation in the country, which is currently running at an annual rate of about 6.5%.
It is difficult to predict the impact on U.S. ethanol producers like Archer Daniels Midland Co. (NYSE: ADM) or Pacific Ethanol Inc. (NASDAQ: PEIX). But ADM, for example, ran negative margins on its ethanol production last quarter. A tax cut in Brazil could make matters worse for U.S. producers.