Investments in sugarcane production have to be evaluated on a case by case basis, because they depend on various factors such as the actual geographic location of the production site, production method, available transport links and distance to consumer markets, as well as the energy market where sugarcane is produced and where it is produced. In addition, the usefulness of sugarcane as an oil substitute primarily depends on the oil price, because if both commodities have the same price tag on them, most customers would choose oil to transport goods and services. But sugarcane not only competes with oil as the main choice of consumers for transportation. When it comes to deliveries in the transportation market, sugarcane is also in direct competion with natural gas deliveries in countries that do not have the option to exploit fossil fuel reserves in their home country. That is especially the case in the European Union, where there is a battle between LNG deliveries on the one hand, and piped natural gas send from Russia on the other hand. In addition, sugarcane also competes with other biofuels in the transport market. In fact, there are a lot of new innovative developments in the energy industry, one promising solution to our energy dilemma could be the use of algae as an oil substitute. I will deal with each point of critique one-by-one to assess if sugarcane is a suitable investment opportunity.
There has been recently a lot of criticism of sugarcane to be used as an oil substitute, and many critics are positioning themselves against using sugarcane as an oil substitute. These critics are pointing out that sugarcane is just too costly as an oil substitute, given the fact that oil reserves diminish over time, we should opt for other types of fuels, such as natural gas which will remain relatively abundant geologically-speaking for the next 20 to 30 years, and which allows the conversion of diesel engines that are using oil to switch to natural gas as transportation fuel, which appears to be a cleaner fuel than oil.
But on a cost-by-cost basis, it really depends where you are geographically located to see if sugarcane makes economic sense to use as an alternative to LNG and oil. If you are located in Brazil for instance, it does make good economic sense to use sugarcane as an oil substitute, whereas natural gas imports from the U.S. in the form of LNG not necessarily means lower production costs. The fundamental nature of Brazil’s geography makes the country much more suited to producing sugarcane at an industrial scale, and given the nature of Brazil’s geographic pivot in South America close to the equator, there is abundant sunlight available for the growth of sugarcane plants. In addition, few ports in Brazil have the capability to process LNG, and the lengthy road network on the eastern fringes close to the Atlantic Ocean, where most of the big cities are located, such as Rio and Sao Paulo, make LNG deliveries to the local population centers even more inconvenient, as every step of the way is adding costs. In fact, sugarcane production is far more distributed throughout the country, its availability is not being hampered or restricted by a few port sites along the Atlantic Ocean. The availability of sugarcane in the central parts of Brazil is virtually guarenteed, and likely to be much cheaper then LNG. As far as oil is concerned, every dollar per barrel of oil can make the difference how far inland one can transport oil to the inner parts of the South America. Currently, Brazil receives a significant amount of its oil supply from Venezuela, which until recently was able to fulfill its end of the bargain and deliver oil to Brazil. Although the recent political turmoil makes one question the continued availability of oil supplies to the Brazil home market.
In India, the situation is rather different. Due to the fact that the majority of the population works in agriculture and the fact that India has a fertile, sunny climate that supports the growth of sugar cane plants, it would make good sense to increase production and thereby reduce energy imports to India, according to Chandra Prasad B S, Venkatesh Reddy D M and Sunil S, as well as Dr. Shrishail Kakkeri. India also stands in competition with China for cheap energy resources.
If, by comparison, Germany would have to make the same choice between LNG supplies, and sugarcane, and adding a third choice in the form of piped natural gas deliveries from Russia, to stay true to Germany’s energy security interests and geopolitical considerations one necessarily opts for piped natural gas from Russia due to its relative abundance and good transport links to the Leningrad region and Russia’s northwestern oblasts. Even LNG would not be as competitive in the long-run, due to the geographic distance to the U.S. market. That does not mean that LNG is not a good substitute for oil supplies, but it simply means that even though Germany has port sites that could handle LNG deliveries, it would not be cost-effective given the nature of Russia’s cheaper energy delivery and very reliable energy supplies. Sugarcane, which cannot be produced at an industrial scale in Europe due to land availability, population density, industrial use and diversity of different energy sources, is unlikely to increase its fraction of sugarcane admixture for diesel fuel in the near future, simply because alternatives are readily available, even though domestic energy resources are diminishing rapidly.
For the United States, in comparison to Brazil and Germany, it is a balanced argument. The fact that the U.S. still has relatively abundant energy resources available in its home market means that the need to switch to biofuels and sugarcane in particular is not as urgent as it is in Brazil. The U.S. also receives energy deliveries from countries in the Middle East, Africa and Venezuela, as well as Canada, which means the diversity of energy supplies greatly diminishes the actual usefulness of sugarcane in the U.S. In addition to that, sugarcane production makes more sense in the southern portion of the United States, and it makes a lot less sense to grow sugarcane in the northern portion of the United States. This partly explains why some regions in the U.S. are so strongly in favor of handing out subsidies to grow more sugarcane and other U.S. states see no need to do that. This in effect explains why the U.S. is also a leading producer of sugarcane, even though it has plenty of energy substitutes, even in the form of coal deposits readily available, but shows strong political preferences for granting these subsidies to sugarcane producers.
In a previous article I have mentioned that algae is one of the latest newcomers to the biofuel industry, but that algae is unlikely to gain significant market share until 2030 simply because the commercialization of algae biofuel has not succeeded at an industrial scale so far, and algae biofuel is not cost competitive just yet. A lot of research has to go into genetic engineering to fatten algae in very little time, to produce more fuel from it.
The needs of the transportation industry
The transportation industry strongly prefers to use oil instead of biofuels, as it has been found that biofuels can be corrosive on the engines. This partly explains why Brazilians are hesitant to buy new cars. Nevertheless, up to a certain percentage of 10% biofuel admixture can reduce our dependance on imported oil.
Summary – Investment Advice
I recommend to invest in biofuels with great caution, and would double down on that advice with regards to making investments in sugarcane. I would generally favor other types of biofuels such as algae, which will take a long time to mature, and have not even been commercialized.