Global biofuel demand and production is expected to rise sharply in the coming years, driven primarily by emerging economies where robust biofuel policies, rising transport demand, and abundant feedstock potential is boosting growth. While a wide swath of the biofuel segment presents a compelling opportunity for investors, we view corn-based ethanol producers in Brazil as particularly attractive. Benefitting from a strong biofuel policy framework and a national biofuels program, Brazilian ethanol production has boomed over the past two decades. More recently, corn ethanol production in the country has jumped as producers benefit from the expansion of "second crop" corn, which can help to lower capex costs and reduce the environmental consequences associated with diverting cropland to grow feedstocks.
Global biofuel demand is set to expand by 38 billion liters over 2023-2028, according to the IEA, a near 30% increase from the previous five-year period. Thereafter, total biofuel demand rises 23% to 200 billion liters by 2028 under the IEA's main case, with the two most common biofuels, biodiesel and ethanol, accounting for more than two-thirds of this growth (Fig 1).1
Figure 1
Global Biofuel Demand, Historical, Main, and Accelerated Case, 2016-2028 (lhs: Billion Liters per Year, rhs: %)
Source: IEA as of January 2024.
Biodiesel is mainly produced through a process called transesterification, where cooking oils like soybean oil and canola oil are turned into an energy-rich fuel that can be used in most diesel engines. Ethanol is typically blended with traditional gasoline and is produced by fermenting the sugar in the starches of grains.2 Demand for these two fuels is largely expected to be driven by robust global biofuel standards, particularly in emerging economies, such as Brazil, Indonesia, and India, where car usage and fuel demand is increasing alongside development.
Brazilian Biofuel Production is Booming
From 1973 to 2022, the share of bioenergy used in Brazil's transport sector increased from just under 1% to nearly 21%.3 Most of these gains have been within the last two decades, a time during which the Brazilian government began pushing for the introduction of flex fuel vehicles (FFVs) that can run on a variety of biofuel blend ratios. The Brazilian government also advocated for the expansion of a fuel distribution infrastructure capable of supplying a gasoline-ethanol blend and pure ethanol at petrol stations, giving drivers the ability to decide which fuel to buy based on the price differential.
Then, the government began stimulating the production of ethanol and biodiesel through fuel blending mandates, with the dual objectives of growing the country's lucrative domestic biofuels industry and ensuring its energy security. Current standards in Brazil require a 27% blend of ethanol in all gasoline, and the country's Ministry of Mines and Energy has begun discussions to raise this mandate even further to 30%.4, 5
Brazil also mandates a blend of biodiesel into diesel of 14%, and a new proposal approved in March 2024 by the Brazilian Chamber of Deputies would see this threshold rise to 15% in 2025.6 These are among the most ambitious biofuel standards in the world, playing a key role in igniting Brazil's biofuel production.
Brazil's Net Aero Ambition Also Provides a Tailwind
In 2021, Brazil submitted its updated Nationally Determined Contribution (NDC), committing to unconditionally reduce its total greenhouse gas emissions by 37% and 50% by 2025 and 2030, respectively, compared to 2005 levels. Long-term, Brazil has committed to achieving net zero by 2050.7
To support the country's commitments under the Paris Agreement, Brazil's National Biofuels Policy ("RenovaBio") was launched in December 2017. RenovaBio enables biofuel producers to issue decarbonization credits ("CBIOs") based on the emissions savings of the biofuels they produce, which can be sold to fuel distributors in exchange for cash. Fuel distributors often resort to purchasing CBIOs in order to meet annual carbon intensity reduction targets set by the government of Brazil.8
Given biofuels comprise 32% of its total energy supply, Brazil's energy sector is already one of the least carbon-intensive in the world. But there remains plenty of room to further decarbonize, and the country's climate commitments and implementation of RenovaBio will continue to benefit biofuel producers.
The Rise of Corn Ethanol Production
Though biofuel producers remain attractive in general given the expected demand, there are particularly compelling pockets of investment opportunities for corn-based ethanol producers in Brazil. Ethanol production in the country has historically come from sugarcane, but this has evolved in recent years (Fig 2). Corn ethanol production in Brazil jumped from 40 million liters in 2014 to 4.4 billion liters in 2023, and production is expected to increase even further: corn-based ethanol is projected to represent 34% of total ethanol production by 2032, up from 23% today.9, 10
Figure 2
Sugarcane and Corn Ethanol Production in Brazil (Billion Liters)
Source: Corn Ethanol National Union, Brazilian Sugarcane Industry Association, Farmdoc Daily as of June 2023.
Unlike sugarcane ethanol producers, corn ethanol producers generally do not grow their own feedstock. Instead, they procure it from a third party. A key benefit to this is the avoidance of significant capex costs associated with owning and maintaining the land necessary to grow corn and other feedstocks.
Additionally, many corn ethanol producers benefit from supplementary revenue streams from the sale of animal nutrition products. These are valuable, protein-rich byproducts of the ethanol refining process that can be sold to offset the costs associated with ethanol production. As a result, corn ethanol can be more cost efficient to produce on a net cost basis due to these offsetting revenues (Fig 3).
Figure 3
Net Cash Costs of Corn Versus Sugarcane Ethanol Producers ($)
Source: PGIM Fixed Income as of December 2023.
Corn Ethanol Production's ESG Impact Implications
Corn ethanol production also has the potential to alleviate some of the ESG concerns surrounding the "food vs fuel" debate. This dilemma describes the negative impacts of diverting farmland to grow feedstocks which are used to produce biofuels, to the detriment of global food supply. For example, the fertile land used to produce corn or sugarcane, the key feedstocks in ethanol production, could otherwise be occupied by crops produced for consumption as food.
On a lifecycle basis, the usage of primary land to grow crops can also reduce the decarbonization benefits of ethanol. Though some estimates have found that corn ethanol can achieve a 40% reduction in greenhouse gas (GHG) emissions on a lifecycle basis, other studies have found these claims may be overstated.11, 12
However, some corn ethanol producers have begun to procure only "second crop" corn for use as ethanol feedstock. In Brazil, "safrinha" corn is a variety of second crop corn planted directly after soybeans are harvested at a time when the land would otherwise be left unused during soybean growing seasons, typically between January and March, requiring no marginal increase in land usage.13
Favorable soil conditions in certain regions also allows some Brazilian farmers to intersperse corn and soybean crops during the same harvest season and in the same planting area. All else equal, we view corn ethanol producers engaging in the procurement of second crop corn more favorably from an ESG impact lens due to less upstream land use change, relative to other biofuel producers.
Continued Growth
The market for ethanol and other biofuels in Brazil will likely continue to expand. Fuel blending mandates and the telegraphed role of biofuels in helping enable the country to achieve its national climate targets through the RenovaBio program provide clear indications of government support. Increased demand for biofuels globally, particularly within emerging economies, also makes the sector as a whole attractive.
Among biofuel producers, the higher free cash flow generation of issuers producing corn ethanol makes them a particularly attractive pocket of opportunity from a credit perspective. By procuring feedstocks instead of growing them, corn ethanol producers are able to avoid the costly capex investments required to maintain fertile land and harvest corn. The ability to sell byproducts of the corn ethanol refining process also provides them with a supplementary revenue stream.
Though there are uncertainties about the lifecycle emissions savings of ethanol, corn ethanol producers using only second crop corn in their production process may also be more suitable for inclusion in our ESG strategies. Taken together, we believe spreads for Brazilian corn-based ethanol biofuel producers appear particularly attractive on a relative value basis.
1 IEA, “Transport biofuels – Renewables 2023”
2 Alternative Fuels Data Center: Ethanol Production and Distribution
3 Brazil: Biofuels Annual | USDA Foreign Agricultural Service
4 This type of fuel is most commonly known as E27.
5 USDA “Biofuels Annual,” September 5, 2023.
6 Fastmarkets, “Brazil's Chamber of Deputies approves proposal to raise biodiesel mandate to 20% in 2030,” March 18, 2024.
7 Federative Republic of Brazil, March 21, 2022.
8 USDA “Biofuels Annual,” September 5, 2023.
9 Based on public disclosure from four large Brazilian biofuel producers.
10 Farm Doc Daily, “Brazil Emerges as Corn-Ethanol Producer with Expansion of Second Crop Corn,” June 30, 2023.
11 Argonne National Laboratory, “Life-Cycle Greenhouse Gas Emission Reductions of Ethanol with the GREET Model,” February 17, 2021.
12 ICCT, “A critique of lifecycle emissions modeling in “The greenhouse gas benefits of corn ethanol— assessing recent evidence,” September 2019.
13 Farm Doc Daily, “Brazil Harvesting Record Second Corn Crop, As Prices Fall and Sales Stall,” June 7, 2023.
Source(s) of data (unless otherwise noted): PGIM Fixed Income, as of August 7, 2024.
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