AMBASSADOR SOBEL'S MEETINGS ON ETHANOL IN SAO PAULO

UNCLAS SECTION 01 OF 02 SAO PAULO 001137

SIPDIS

SIPDIS

DEPARTMENT FOR WHA/BSC, WHA/EPSC, S/P MANUEL
NSC FOR FEARS
STATE PASS USTR: SCRONIN/MSULLIVAN

E.O. 12958: N/A
TAGS: EAGR ENRG ETRD EINV BR
SUBJECT: AMBASSADOR SOBEL'S MEETINGS ON ETHANOL IN SAO PAULO



1. Summary: During his October 4-10 visit to Sao Paulo, Ambassador
Sobel met with the new country president of Archer Daniels Midland
(ADM),who advised that prospects for new infrastructure investment
in Brazil are poor and that the company does not plan to produce
ethanol outside the U.S. The Ambassador also met with Rubens Mello,
CEO of Brazil's largest sugar company, and toured a sugar/ethanol
mill. Mello advocated for the lifting of the U.S. import levy on
Brazilian ethanol exports. He expressed some doubts about the
prospects for developing biofuels industries in third countries.
End Summary.

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MEETING WITH ADM
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2. Ambassador Sobel met October 5 with Domingo Lastra, the new
president of Archer Daniels Midland (ADM) in Brazil. Lastra provided
an overview of the company's activities in Brazil, Paraguay and
Bolivia and noted that the Brazil unit is responsible for activities
in all three of those countries. He further noted that ADM's
activities are overwhelmingly focused on origination, processing and
sales of soy, grains, and some other primary commodities, as well as
grower financing and input distribution.


3. The Ambassador asked about the possibilities for further
development of transport infrastructure and the prospects for
Public-Private Partnership (PPP) development projects. Lastra
replied that investment in infrastructure has been negligible over
the past few years, and that prospects for new investments are poor
due to lack of government funding and lack of adequate guarantees of
public contributions in PPP projects.


4. Ambassador Sobel further noted that ADM is the U.S.'s largest
ethanol producer and asked if the company has interest in producing
ethanol either in Brazil or in third countries. Lastra responded
that as far as he is aware, ADM has no plans to produce ethanol
outside the U.S. He also noted that ADM's new CEO, Patricia Woert,
would visit Brazil October 18-20 to discuss the ethanol market with
Development and Trade Minister Furlan and others.

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COSAN: SUGAR AND ETHANOL DISCUSSIONS
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5. On October 9, the Ambassador, accompanied by DPO and ATO
Director, visited the corporate headquarters of Cosan in Sao Paulo
and the Costa Pinto sugar/ethanol mill in Piracicaba in the interior
of the state. Cosan is the largest sugar company in Brazil,
producing about eight percent of Brazil's sugar and ethanol. The
Ambassador was hosted for the day by COSAN CEO Rubens Mello and
Eduardo Carvalho, President of the Sao Paulo State Sugar Industry
Association (UNICA).


6. The day began with a meeting at Cosan headquarters. Mello gave
an overview of his company's activities and size in relation to the
Brazilian industry as a whole. Cosan is Brazil's largest production
group, with 17 sugar mills and interests in two sugar/ethanol export
terminals in the port of Santos. Dr. Carvalho emphasized the
importance of Sao Paulo state in national sugar production. About
65 percent of Brazilian sugar is produced in the state. The
Ambassador asked what the key is to building a world ethanol market.
Both responded that lifting of the $0.54/gallon import levy on
Brazilian exports would be the key to building volume and allowing
the market to develop. With respect to prospects for developing
biofuel industries in third countries, Mello said that the
possibility exists, but that third country sugar industries are
often propped up by artificially elevated local prices and
preferential access to markets such as the U.S. or the E.U. As a
result, ethanol is not a cost-effective use for local cane in these
countries.

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VISIT TO SUGAR MILL
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7. The group then proceeded to Piracicaba and toured the Costa

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Pinto sugar mill. Costa Pinto was built in 1946 and crushes
approximately 1.5 million tons of sugar cane per year, producing
both sugar and ethanol. The Ambassador and his delegation were
driven to the canebrakes and observed manual harvesting of sugar
cane, which is still needed for cane planted in rough terrain, as
well as mechanized harvesting at cane planted in level terrain.
Afterward, the group followed the progress of cut sugarcane through
the delivery and crushing areas. At Costa Pinto, two lines with
five mills each crush sugarcane 24 hours a day from April through
November. The group also visited the ethanol production line,
receiving an explanation on the fermentation and distillation
process.


8. Following the mill visit, the group transferred to the Mello's
Campo Alto farm for lunch. Discussion centered on Brazil's desire
for access to the U.S. ethanol market, prospects for development of
sugar/ethanol industries in other countries, and new investor
interest in the Brazilian sugar industry. Mello will be traveling
to Washington in the near future, and Ambassador Sobel recommended
that he meet with several people in Washington including both IDB
and Department contacts. Post will forward Mello's agenda to Greg
Manuel (S/P) for follow-up.


9. This cable was coordinated with Embassy Brasilia and cleared by
Ambassador Sobel.

MCMULLEN