Abstract
Purpose – The main goal of this study is to demonstrate the value of flexibility within sugar and ethanol production. We use real data for the Southeast and Northeast regions of Brazil, which are subject to different taxes rates. Design/methodology/approach – The framework of this study is based on Real Options valuation. We valued the option to switch between sugar and ethanol production. The dynamics of prices was based on the recombinant trees of Nelson and Ramaswamy (1990) and on the bivariate trees of Hahn e Dyer (2011). Empirical data is from the Center of Advanced and Applied Economic Studies (CEPEA), ESALQ-USP, from May/2003 through July/2014. Prices were deflated using the Brazilian Price Index (IGP-DI), available at the Ipeadata site based on July/2014. Findings – The results show that, in both regions, flexible systems have greater value than those that produce only one product. Southeast plants exhibit greater value added if compared with Northeast plants, not only because of lower taxes, but also due to higher productivity. Originality/value – This paper quantifies value added by the flexible system in the production of sugar and ethanol in two Brazilian regions subject to different taxes. Moreover, it demonstrates that regulators can use policies and incentives to establish flexible plants. In this way, both producers and fiscal authorities will achieve greater gains.
Highlights
The development of the Brazilian ethanol industry is the best example in the world of the production and use of renewable energy on a large scale
It was crucial to have specific legislation, as well as initial subsidies and permanent negotiation between the main stakeholders involved: ethanol producers, vehicle manufacturers, government regulatory sectors and the oil industry, in an intense and continuous learning process (Macedo, 2007). These facts led to the development of the ethanol industry, which, along with the technology of flexible production plants, give businessmen the option of producing two commodities: sugar and/or ethanol, depending on which is most profitable at a given time
According to the second survey of 2013/2014 crops carried out by the Brazilian Ministry of Agriculture, Livestock and Supply [Ministério da Agricultura, Pecuária e Abastecimento, MAPA] in cooperation with the National Supply Company [Companhia Nacional de Abastecimento, CONAB] in August 2013, the area of sugarcane crops for sugar and cane production was estimated at 8,799,150 hectares, distributed across all producing states according to their characteristics
Summary
The development of the Brazilian ethanol industry is the best example in the world of the production and use of renewable energy on a large scale. It was crucial to have specific legislation, as well as initial subsidies and permanent negotiation between the main stakeholders involved: ethanol producers, vehicle manufacturers, government regulatory sectors and the oil industry, in an intense and continuous learning process (Macedo, 2007) These facts led to the development of the ethanol industry, which, along with the technology of flexible production plants, give businessmen the option of producing two commodities: sugar and/or ethanol, depending on which is most profitable at a given time.
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