ECONOMIC VIABILITY OF FUEL ALCOHOL PRODUCTION FROM RESIDUES OF SUGARCANE BRANDY BY PRODUCERS ASSOC

An ASABE – CSBE/ASABE Joint Meeting Presentation Paper Number: 141910018

ECONOMIC VIABILITY OF FUEL ALCOHOL PRODUCTION FROM RESIDUES OF SUGARCANE BRANDY BY PRODUCERS ASSOCIATION Gilberto Garcia Bonato Filho1, Roberto Precci Lopes2, José Helvécio Martins3, Juarez de Sousa e Silva4 1. Agricultural and Environmental Engineer – Muriaé MG, Brazil. gilbertogbfilho@gmail.com 2. Professor Universidade Federal de Viçosa/Agricultural Engineering Department. 36570-000.

Vicosa-MG. Brazil. roberto.precci@ufv.br 3. Professor Universidade Federal de Viçosa/Agricultural Engineering Department. 36570-000.

Viçosa-MG. Brazil. jhmartins@ufv.br 4. Professor Universidade Federal de Viçosa/Agricultural Engineering Department. 36570-000.

Vicosa-MG. Brazil. juarez@ufv.br

Written for presentation at the 2014 ASABE and CSBE/SCGAB Annual International Meeting Sponsored by ASABE Montreal, Quebec Canada July 13 – 16, 2014 Abstract. The production of good quality sugar cane brandy depends on some practices, such as separating the distilled fractions at the beginning and at the end of the process, which should not be part of the final product. These fractions named "head" and "tail" of the distillation, can be turned into ethanol to be used as fuel to drive farm machinery, heating and electricity generation. Based on technical coefficients obtained from the production of sugar cane brandy and ethanol from the residues of the sugar cane brandy production, it was performed a study of the economic feasibility of the production of fuel alcohol from residues of cachaça by sugar cane brandy producers association located in the micro region of Viçosa, Minas Gerais State, Brazil. The results showed that the production of fuel alcohol from the "head" and "tail" of sugar cane brandy in producers' association is a profitable activity. The cost of producing a liter of fuel alcohol for the first one cycle of sugar cane was around $ 0.45, and for the second one cycle it was $ 0.30. At gas stations, the product is marketed at a price of $ 1.00 per liter. Since in Brazil commercialization of biofuels can only be made among associated producers or sold to distributors of fuels, was studied the possibility of integrating the local taxi drivers association for consumption of the fuel produced. This option also proved to be profitable for all members.

Keywords. Farmer, energy, cachaça, residues, head and tail, cooperative.

INTRODUCTION The sugarcane is one of the most versatile grasses grown in tropical regions. Serves as raw

material for the production of brown sugar, molasses, cachaça and fuel alcohol, or in natura, as forage for cattle. The cultivation of sugarcane is part of day-to-day Brazilian family farming. It is an important source of energy for cattle in the dry season. Integrated production of fuel ethanol from sugarcane, brandy, meat and milk is one of the best options for power generation, employment and income in rural areas. A recent study published in Bonn, Germany, cites some cases of production of fuel ethanol in Brazil by small producers.

According to Scholtes (2009), Brazil could be a model of development and poverty reduction in the world, if there was legislation favoring the production of fuel alcohol by small producers. In a survey conducted by Brazilian Institute of Cachaça (IBRAC, 2013), it is estimated that in Brazil there are more than 40,000 producers and 4,000 brands of cachaça, and the major part of producers are small business owner. The sector of cachaça is responsible for generating more than 600,000 jobs, direct and indirect. The installed capacity of production of cachaça is estimated at 1.2 billion liters. During the production of cachaça it generates a residue called head and tail, which if not conveniently tract can contaminate the environment. One way of making use of these residues is to turn them into fuel alcohol. In Brazil, the sale of fuel alcohol by the farmers is prohibited. So, the most convenient way to commercialize the ethanol produced in the farm is through farmers associations or cooperatives. The organization of small producers into associations or cooperatives generate a significant volume of head and tail residues, which if converted into fuel alcohol can be another source of income for small farmers. These entities can commercialize the product among their members or with distributors of fuels. The presence of the taxi drivers in the association of producers is a positive alternative to the consumption of the fuel alcohol produced. Taxi drivers earn buying a fuel at a price lower than that found in the market and the producers earn by selling a product that was produced from residue that used to be discarded before.

OBJECTIVE This study aimed to determine the cost of production of fuel alcohol made from residues of the production of cachaça (sugarcane brandy) by producers’ association.

MATERIALS AND METHODS The research was conducted in a farm with a structure to produce fuel alcohol from head and tail of cachaça. The farm is located in Cajuri County, State of Minas Gerais – Brazil, and has a rectification column with a capacity of 1200 L of pre-distilled mixture of head and tail on process of batch. It was analyzed the possibility of creating an association of producers formed by producers of cachaça of the neighborhoods. For creating the association it was stipulated a minimum of 15 associated with alembic size of 300, 500, 700 and 1000 liters. In order to improve the quality of the cachaça and make it an excellent product, the association must impose some rules. All members must eliminate the head of cachaça with the first 15% of the volume of cachaça distilled, and for the tail the last 20%. The calculations were carried out considering a percentage of 8% of ethanol in the total volume of fermented juice. Fixed costs and variables for production of fuel alcohol in the hypothetical association were divided among the members according to the volume of pre-distillate supplied by each one. The analysis accounted to the period of six years of production of sugarcane.

Each member is responsible for bringing their pre-distilled and delivers it in the association headquarters. The associate has the option to choose which final destination he (or she) wants for the quota of fuel that belongs to him (her). They can commercialize the quota of 2014 ASABE – CSBE/SCGAB Annual International Meeting Paper

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fuel with other members or consume it for their own benefit. The costs for the acquisition of equipment were divided in eight years, including interest at 6% per year. The value is equivalent to savings. The useful life of the equipment was estimated at 20 years, plus, per year, a portion of depreciation for replacement of equipment at the end of useful life. Table 1 shows the production by batch of head, tail and cachaça for each associate (Bonato Filho, 2013). Each associate produces two batches per day.

Table 1. Capacity of production of each member.

Size alembic (L) Production cachaça 45°GL Production head (L) 60°GL (L) Producer 1 1000 115.6 20.0 Producer 2 700 80.9 14.0 Producer 3 300 34.7 6.0 Producer 4 300 34.7 6.0 Producer 5 500 57.8 10.0 Producer 6 300 34.7 6.0 Producer 7 500 57.8 10.0 Producer 8 700 80.9 14.0 Producer 9 300 34.7 6.0 Producer 10 500 57.8 10.0 Producer 11 500 57.8 10.0 Producer 12 300 34.7 6.0 Producer 13 300 34.7 6.0 Producer 14 700 80.9 14.0 Producer 15 300 34.7 6.0 Total volume 832.0 144.0 Producer

Production tail 25°GL (L) 64.0 44.8 19.2 19.2 32.0 19.2 32.0 44.8 19.2 32.0 32.0 19.2 19.2 44.8 19.2 460.8

For the economic analysis it was performed a cash flow with all expenses and annual income of the enterprise, assuming that all production of cachaça was sold and fuel alcohol sold among associates. Costs of production for four categories of members, ranked according to the size of its alembic were analyzed. It was not assigned a cost of production of head and tail, because it is a residue to be discarded. The sales value of the fuel alcohol produced was established at $ 0.75 (R$ 1.70) per liter, lower than the market value which was $ 1.00 (R$ 2.29).

RESULTS AND DISCUSSION The production of head and tail (mixture) during 200 days of labor per year was 241,920 liters. Table 2 shows the potential production of cachaça graduated 45°GL and mixture of head and tail with an average of 33°GL, per each member of the producers’ association.

Therefore, the total production of alcohol was 81,555 liters of ethanol at 93°GL, or on average, 223 liters per day of the calendar year.

Table 2. Production of cachaça and mixture of head and tail per producer per year Production of the mixture of Production of fuel alcohol at Size alembic Producer Production of cachaça head and tail at 33ºGL 93°GL (L) (L) (L) Producer 1 1,000 46,200 33,600 11,326 Producer 2 700 32,400 23,520 7,929 Producer 3 300 14,000 10,080 3,398 Producer 4 300 14,000 10,080 3,398 Producer 5 500 23,200 16,800 5,664 Producer 6 300 14,000 10,080 3,398 Producer 7 500 23,200 16,800 5,664 Producer 8 700 32,400 23,520 7,929 Producer 9 300 14,000 10,080 3,398 Producer 10 500 23,200 16,800 5,664 Producer 11 500 23,200 16,800 5,664 Producer 12 300 14,000 10,080 3,398 Producer 13 300 14,000 10,080 3,398 Producer 14 700 32,400 23,520 7,929 Producer 15 300 14,000 10,080 3,398 Volume total 334,200 241,920 81,555 2014 ASABE – CSBE/SCGAB Annual International Meeting Paper

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The price of gasoline at gas station in Viçosa - MG was on average $ 1.35 (R$ 3.09 on March, 2013) and ethanol nearly $ 1.00 (R$ 2.29) per liter. If the producer’s association commercializes ethanol among theirs members, a fair value could be 55% of the price of gasoline, or nearly $ 0.75 per liter. Under these conditions, the associated economizes $ 0.25 per liter. Once the commercialization of the product among members is allowed, if the association wish to sell all alcohol produced, it could invite new members, for example, associated taxis drivers.

The cost to build an association for production of fuel alcohol from residues of cachaça is shown Table 3. The estimated value was US$ 117,927.00 payable in 8 years.

Table 3. Costs with equipment for production of fuel alcohol from residues of the cachaça production in producer’s association system.

Description Quant.

Unitary value ($) Total value ($) Construction of the structure of the association 1 65,502.00 65,502.00 Rectification column of 1200 L 1 5,240.00 5,240.00 Stainless tank 1500 L 1 1,528.00 1,528.00 Stainless Storage Tank of 10000 liters 4 8,734.00 34,936.00 Subtotal 107,206.00 Outras: 10% 10,721.00 Total 117,927.00

Table 4 shows the cost of labor for operating the rectification plant. These values also were divided by all members according to the pre-distillate volume delivered by each associate.

Description Labor (2 workers) Subtotal Employer social charges: 33,77% Total

Table 4. Costs of labor for the production of alcohol Quant.

Unitary value ($) 24 months 296.00 -

Total value ($) 7,106.00 7,106.00 2,400.00 9,506.00

Table 5 presents the participation of each member in the annual production of fuel alcohol by the association system.

Table 5. Division of ethanol quotas among members according to the volume of pre-distilled delivered.

Volume mixture head and tail Volume fuel alcohol per year Quota Producer (L/day) (L) (%) Producer 1 168 11,326 13.9 Producer 2 117 7,929 9.7 Producer 3 51 3,398 4.2 Producer 4 51 3,398 4.2 Producer 5 84 5,664 6.9 Producer 6 51 3,398 4.2 Producer 7 84 5,664 6.9 Producer 8 117 7,929 9.7 Producer 9 51 3,398 4.2 Producer 10 84 5,664 6.9 Producer 11 84 5,664 6.9 Producer 12 51 3,398 4.2 Producer 13 51 3,398 4.2 Producer 14 117 7,929 9.7 Producer 15 51 3,398 4.2 Total 81,555 100,0

Economic analysis Case study 1 - Cost of production of fuel alcohol for a producer with alembic of 300 L Figure 1 shows the cash flow for an associate with alembic of 300 L. For these members each $ 1.00 invested there is return of $ 1.70 for a product before discarded. The net 2014 ASABE – CSBE/SCGAB Annual International Meeting Paper

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present value at the end of the first year was $ 4,262.77, representing a gain of $ 710.00 per year for a product that useless before.

Figure 1 - Economic analysis of ethanol production for a producer with alembic capacity of 300 L.

The cost of producing one liter of fuel alcohol for the first year of production was $ 0.44, with a benefit/cost ratio of 1.70. For the second year, this value was $ 0.30, with a benefit/cost ratio of 2.43. The production capacity of this associate was 3,398 liters of fuel alcohol. If he was to buy this fuel at the gas station he would pay the price $ 3,398.00 per year. In the association system, he purchases the same amount of fuel for $ 1,495.00. Since the cost of production was US$ 0.44 per liter, then he would save $ 1,903.00, if he consumed all alcohol.

Case Study 2 - Cost of production of fuel alcohol for producer with alembic of 500 L. Figure 2 shows the cost of production for producers with alembic capacity of 500 liter.

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Figure 2 - Economic analysis of production for an associated with alembic capacity 500 L.

Note that the activity is feasible in the first year of production. For each $ 1.00 invested by the producer, he has return of $ 1.72, with a time of return of 1.53 years. The net present value at the end of cycle was $ 7,231.48 or $ 1,205.24 per year. The cost of producing a liter of fuel alcohol in the first year of production was $ 0.43. For the second year this value was $ 0.30, with a benefit/cost ratio of 2.46. The production capacity of this associate is 5,664 liters of fuel alcohol. If he was to buy this fuel at the gas station he would pay the amount of $ 5,664.00 per year. In association system, he purchases the same amount of fuel for $ 2,435.52 since the cost of production was $ 0.43. Thus, would save $ 3,228.48 if all this alcohol is consumed.

Case Study 3 - Cost of production of fuel alcohol for producer with alembic 700 liters.

The cash flow, presented in Figure 3, for the producer with alembic 700 liters, as for the other cases, showed that the activity is feasible.

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Figure 3 - Economic analysis of fuel alcohol production for an associate with alembic of 700 L.

For this producer, for each $ 1.00 invested, there is a return of $ 1.67 and a time of return is 1.73 years. The net present value was $ 9,622.16 or $ 1,603.69 of income per year from a product that had no previous use on the property. The cost of producing a liter of alcohol for the first year of production was $ 0.45, while for the second year it was $ 0.30, with a benefit/cost ratio of 2.48. The production capacity of this associate was 7,929 liters of alcohol. If he was to buy this fuel at the gas station he would pay the amount of $ 7,929.00 per year. In the association system, he purchases this same amount of fuel for $ 3,568.05 since the production cost was $ 0.45. Thus, he would save $ 4,360.95 if all his quota of fuel alcohol is consumed.

Case Study 4 - Cost of production of fuel alcohol for a producer with alembic 1000 L. From the analysis of the data of Figure 4 it can be concluded that the activity is immediately feasible for the first year of production. It can be seen that for each $ 1.00 invested there is a return of $ 1.72. The net present value was $ 14,456.69 or $ 2,409.45 of annual income from a product without usefulness.

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Figure 4 - Economic analysis of ethanol production for an associate with alembic of 1000 L.

The cost of producing one liter of fuel alcohol in the first year of production was $ 0.43. For the second year this value was $ 0.30, with a benefit/cost ratio of 2.46. The production capacity of this associated is 11,326 liters of alcohol. If he buys this fuel at the gas station he would pay the amount of $ 11,326.00 per year. In the association he purchases the same amount of fuel for $ 4,870.18 since the cost of production was $ 0.43. Thus, he would save $ 6,455.82 if all this fuel alcohol is consumed.

Ethanol production in association systems is interesting because it avoids idle periods on the farm, if the producers chose to produce their own fuel alcohol from head and tail of cachaça.

In association systems the fuel alcohol can be produced along all year due to the large volume of mixture of head and tail received. Another aspect favorable to the production of fuel alcohol in association systems is market. The organization has a sufficient volume of fuel alcohol to allow that the fuel distributors can buy it, while the isolated production on small farms hardly reaches that volume. The Figure 5 summarizes the production of cachaça, mixture of head and tail, and fuel alcohol for each size alembic.

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Figure 5 - Comparison of production of cachaça, head and tail and fuel alcohol for different size alembic.

The results of the economic analysis showed that both, the time of return and benefit/cost ratio, were similar for all producers, and as the most fair costs for all members of the association were organized.

The table 6 presents the economic analysis of the first two year of fuel alcohol production, Based on the results of the economic analysis, it was found that the production of fuel alcohol in association systems is a profitable activity and has achieved positive results in the first year of production, At this point, it is important to note that fuel alcohol has a much higher liquidity than cachaça. The beverage is consumed in small amounts, while the fuel alcohol is consumed in large quantities. Therefore, the production of only fuel alcohol may be an alternative adopted by producers in the periods in which the sale of cachaça is low.

Table 6. Summary of economic analysis for the first two years of production of fuel alcohol from head and tail of the production of cachaça.

First year Second year Alembic [1] [2] [3] [4] IRR TRC RBC PC IRR TRC RBC PC 300 L 184,27 1,53 1,70 0,44 158,22 1,76 2,43 0,30 500 L 189,17 1,53 1,72 0,43 161,42 1,74 2,46 0,30 700 L 135,37 1,73 1,67 0,45 162,78 1,73 2,48 0,30 1,000 L 189,10 1,53 1,72 0,43 161,37 1,74 2,46 0,30 [1]

IRR – Internal rate of return. [2] TRC – Payback period. [3] RBC – Benefit/cost rate. [4] PC – Production cost.

The sale of fuel alcohol produced in association system to the distributors of fuels is not a profitable activity. The cost of production by large plant is around $ 0.49 a liter. The production cost in association system for the first year was close to this value, making it non attractive for associates. An alternative would be the inclusion of 5 taxi drivers in the association, to complete the total of 20 members, maximum limit to form an association.

Inclusion of taxi drivers In a survey with taxi drivers in the region it was found that they run 160 km, on average, in a day of service, with average consumption of 8 km.L-1. Taxi drivers get the fuel at gas station for $ 1.00 a liter, and require, approximately, 20 liters of alcohol per day or 7,300 liters per year. The association has production capacity of 81,555 liters per year or 224 liters of alcohol per day, which would supply five taxi drivers and the remainder used by other 2014 ASABE – CSBE/SCGAB Annual International Meeting Paper

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members. If there is no demand for fuel by the producers, an alternative would be the foundation of a cooperative for inclusion of new taxi drivers. To verify the feasibility for taxi drivers to participate in the association, it was made a cash flow (Figure 6). Taxi drivers must purchase quotas to join the association, which value must be one percent. This value was based on the costs associated with the acquisition of equipment, depreciation, labor, and others. The input value was the economy of $ 0.26 per liter achieved with the direct purchase of alcohol from the association. It was found that the benefit/cost ratio was 5.37 and the time of return of 1.09 years. The discounted annual balance was $ 1,070.90, saving the amount of $ 89.24 per month.

Figure 6 - Economic Analysis for the participation of the taxi drivers in association.

CONCLUSION The production of the fuel alcohol from the head and tail of cachaça by producers’ association proved to be economically viable and a good alternative to use the residues from production of cachaça to generate income. Production costs were similar for all associates, showing that the way the distribution of costs among members was made is fair. The participation of the taxi drivers in the association is important for the consumption of the excess of fuel alcohol produced, and brings benefit for all associates.

Acknowledgements The authors thank the Coordination for the Improvement of Higher Level Personnel (CAPES) for financial assistance for realization of research.

References

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BONATO FILHO, G. 2013. Producao de alcool combustivel a partir de subprodutos da fabricacao de cachaca para associacao de produtores. MS thesis. Vicosa: Universidade Federal de Vicosa, Departamento de Engenharia Agricola.

IBRAC - Instituto Brasileiro da Cachaça (2013). Mercado Interno. Brasília http://www.ibrac.net/index.php?option=com_content&view=article&id=46&Itemid=47.

–

DF.

Retrieved

from

SCHOLTES, F. 2009. Status quo and prospects of smallholders in the Brazilian sugarcane and ethanol sector: Lessons for development and poverty reduction. Retrieved from http://hdl.handle.net/10419/88388.

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