Risk analysis of using sweet sorghum for ethanol production in southeastern Brazil

Our objective is to evaluate the economic feasibility and the risks associated with the utilization of sweet sorghum as a raw-material for the production of ethanol at a representative sugar mill in São Paulo State, Brazil. The economic payback of the working mill is compared with and without sweet sorghum. A sensitivity analysis of sweet sorghum yield is made to empirically estimate the risk associated with adding sweet sorghum in an ethanol mill during the sugarcane off season. The results of a Monte Carlo simulation analysis indicate that the addition of sweet sorghum on 20% of the sugarcane land can increase net present value and average annual net cash income and reduce the relative risk for net income and net present value. Given current yields for sweet sorghum in the study area, risk averse decision makers would have a risk premium benefit of about R$4.5 million per year in average annual net cash income. The analysis suggests that adding sweet sorghum to the crop mix will reduce the costs for a mill by spreading fixed costs across more ethanol. Also, an addition of sweet sorghum would increase ethanol receipts more than the variable costs of cultivating and harvesting the crop plus the costs of producing ethanol. Despite the profitability and risk reducing benefits of sweet sorghum, wide spread adoption has not occurred in southeastern Brazil. The uncertainty about yields and effects on labor scheduling may be factors in the slow rate of adoption. Improvements in sweet sorghum yields would likely increase the rate of adoption.