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“I am in favor to the Proer for the sugarcane industry,” says USP’s economist

Edgard Monforte Merlo, economist specialized in macroeconomics and professor at the Faculty of Economics, Business and Accounting (FEA) of USP in Ribeirão Preto, is personally in favor of being offered some sort of financial refinancing for plants and the sugarcane industry suppliers. In the following interview, he explains the reasons for this position.

Are you in favor to a Proer for sugarcane industry?

Edgard Monforte Merlo – personally I am in favor to the offer of some type refinancing type of the happened with Proer for the section (plants and suppliers).

How?

Conditioning the offering collateral drivers and with an approved restructuring plan aimed at obtaining a new balance in a maximum of two years.

What is the result?

The industry would gain some breathing space to restructure. However, restructuring should be incorporated as a pressing need. This would involve, develop new sources of revenue, such as cogeneration and even the planted area reduction, aiming to balance supply and demand for sugar and ethanol.

Why is a refinance strategic?

The financial sector is averse to providing credit, because fears not receive loans, considerate the financial situation of the sugar and ethanol. The industry sector in the process of restructuring, should commit to minimum levels of productivity and costs to be achieved in crops and, when this is not possible, with the execution of a divestment plan and diversification to avoid a repeat of this great dependence.

Tell us more about it, please

In fact Proer should work as an investment adjustment rule that would combine with an adequacy offer. In the United States there are “belts” production (corn belt, cotton belt, etc.). In my view, in Brazil should consider similar policies (to define maximum areas for state to receive production incentive).

What is the result?

This would avoid a repeat of the current situation, where practically established a large monoculture that is very vulnerable when there is a shortage of international prices combined with an internal control of the prices and adverse weather conditions.

Why help the industry with refinancing?

The agricultural sector has some interesting features:

1 It is a sector dominated by a competitive market that means that individually no producer can influence the market price, so it is a price taker sector (no ability to influence the market price) that is formed in major world markets. This is particularly true for the case of sugar which is a commodity;

2- When we have the situation of a small number of plants in difficulties, we can say that there was a mismanagement problem. When we watch a large number of companies in financial difficulties, we can say that the whole industry suffered some kind of shock that that took to the unbalance;

3- In the case of sugar and ethanol sector, considering the number of companies in difficulty happened an imbalance generated by ethanol pricing policy. The ethanol industry has somehow his price tied to the price of gasoline because the allocation of the same is mainly oriented to fuels. As in the case of petrol, the two years that have passed the price of fuel was tightly controlled to avoid inflationary pressures, began to happen an imbalance in the sugarcane industry. On the other hand the price of fuel was constant and the other was a continuous increase in costs (because most of the inputs had adjustments, tightening the industry margin). In conclusion, this chaotic situation in the sector was generated by international price decline of the sugar industry, combined with adverse weather conditions (drought) and with a price of alcohol that was practically frozen.

4-Worldwide, due to the fact that the agricultural sector is a sector that depends upon the market prices in a competitive industry, where imbalances occur the government has intervened in order to resume the supply and demand balance through the price mechanism.

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