Heather Davis, Senior Managing Director, Global Private Markets
July 12, 2013
The global spotlight will shine brightly on Brazil over the next few years when it hosts the 2014 World Cup, followed by the 2016 Summer Olympics in Rio de Janeiro. Millions of international visitors will witness a nation that has transitioned from a military dictatorship to one of the world’s largest free-market societies over the span of a few decades, while unlocking the vast potential of a resource-rich region. While Brazil serves as an excellent example of economic transformation, the country’s recent large-scale public demonstrations also reveal that many social challenges remain for this developing economy, including addressing corruption and meeting the needs of its growing middle class.
With millions of people rising from poverty, a critical issue for Brazilians hinges on whether the government can keep the lights on — literally. The nation needs to add an estimated 6,000 megawatts of electricity-generating capacity each year to keep pace with demand. Brazil’s heavy reliance on dams further complicates the need, because while abundant and cheap, hydropower can be fickle during dry and low-water-flow periods, which tend to occur seasonally. Sporadic blackouts and outages are not unusual and occur sometimes during dry seasons, including during one memorable period from 2001-2002, which Brazilians remember as the apagão, (meaning “big blackout”) when rolling blackouts punished the nation and its economy. A dearth of rain last year had reservoirs at 30% capacity — lower than the levels during the 2001-2002 apagão.
To help fill the immediate need and address potential shortages, the Brazilian government has increasingly turned to local sugarcane growers who are transforming a farm waste product, known as bagasse, into electricity. For sugarcane farmers and their investors, bagasse has become a bonanza. This energy trend demonstrates how institutional investors with direct investments in real assets, such as farmland, are generating additional income from their holdings, which helps achieve greater portfolio stability and improved diversification.
Brazil’s reliance on hydropower
Brazil has historically relied far more on hydropower than most nations, with about 80% of its electricity generated from the dams blocking rivers in the Amazon River basin. By comparison, 16.7% of the globe’s electricity comes from hydro sources, while two-thirds of the world’s power needs are served by burning fossil fuels.
Although clean and efficient, hydropower is far from a panacea. The government can’t make it rain more, and therefore hydropower will always suffer from seasonal variations in water flow levels, which undermine efficiency in power generation.
The Belo Monte hydropower construction project, currently being developed, highlights this problem. The Belo Monte will dam the Xingu River in the Amazon and will be the largest such project in the world. Because of variable seasonal water flow, however, it is estimated that only 40% of Belo Monte’s 11,000 megawatt installed capacity will be used each month on average. While this project underscores one of the great shortcomings of hydropower, it also shows the great potential for alternatives such as converting sugarcane bagasse into biofuel.
Processing sugarcane into biofuel for cars and electricity
Brazil is the world’s largest producer and exporter of sugar and the second-largest ethanol producer. More than three-quarters of Brazil’s vehicles run on biofuel, making sugarcane integral to Brazil’s economy. Sugarcane farming is profitable, but comes with a large fixed cost: removing the large piles of bagasse, or the leftover pulp that accumulates at the mill after processing the crop.
To make sugar or ethanol from sugarcane, mill operators crush the cane, which is like a stalk of corn without the ears. They pull off the leaves, leaving just a stick, which is the cane, and then crush it to make either sugar or ethanol using large boilers. The leftover bagasse is piled up at the mill and then removed as waste. Some mill operators have used the bagasse, which has the same energy intensity as wood, to power their own mills during sugar and ethanol processing. Many sugarcane mills, however, are also burning the bagasse in their own retrofitted boilers, which can power turbines that feed electricity to Brazil’s electric grid. This not only creates large savings for the mill, but also provides another source of income, as the government buys the electricity supplied to the grid.
The bagasse piles up, coincidentally, during the seasonal periods when water flow hits the lowest point in many areas, and the threats from blackouts and outages are the greatest. For these reasons, this practice has gained significant traction in recent years. Bagasse-fueled turbines currently supply about 7% of Brazil’s total power, and that figure could double in the coming years through further adoption of the practice and through more efficient use of the waste. By one estimate, bagasse could supply up to 20,000 megawatts of power to the Brazilian grid in just a few years.
Investment implications of bagasse: Adding value in a farmland portfolio
The versatility of sugarcane farming, and the emergence of bagasse as a source of biomass electricity, highlights a core tenet of TIAA-CREF’s approach to farmland investing. We invest in farms because we believe they will appreciate in value, as the world population is growing faster than the food supply. We also seek agriculture investments with the flexibility to pivot when markets and consumer needs change. That’s why we seek out farm investments that have potential to add value to the underlying crops, including those that develop biofuels such as ethanol and bio-diesel and biomass electricity from sugarcane and timber.
Through our partnership with Brazilian-based Cosan SA, the world’s largest producer of ethanol and sugarcane, we developed Radar, a joint venture business that seeks to identify and acquire farms with strong investment potential across Brazil. Through Radar, we seek value-added investment opportunities, such as sugarcane farming, that offer multiple possibilities for earning income and mitigating risk over our investment time horizon, which stretches out over 20-30 years.
Looking ahead: Fueling continued Brazilian growth
While we view investing in farmland as a long-term proposition, we’ve seen in recent years how the dynamics of an asset class can quickly change as a result of trends taking shape in markets around the globe, such as the growing need for electricity in emerging economies like Brazil. The June protests showcase the challenges societies may face after experiencing rapid growth and transformation: Protestors rallied against a government that many view as corrupt and willing to spend billions on World Cup stadiums while ignoring issues important to them, including rising inflation, healthcare, violent crime and horrific urban traffic. Keeping pace with energy demands is another significant issue the government must address for its citizens, not only over the next few years, but for decades to come. Suffering blackouts and power outages would further inflame resentment among Brazilians.
Electricity — like food and fuel — is a need, not a luxury. Farmland offers the opportunity to feed growing populations and provide fuel and energy as well. It also affords excellent opportunities for strong returns, potential for inflation protection and broad portfolio diversification. In an increasingly complex and challenging world, investing in real assets such as farmland can enhance risk-adjusted returns and provide attractive growth, which is why TIAA-CREF believes the asset class has such an important role for investors with long-term horizons.
TIAA’s Agriculture investments are just one of many investments of TIAA’s General Account, an account solely owned by TIAA that is not available to individual investors and whose performance is not directly allocated to any specific contract or obligation. TIAA’s General Account invests in a broad range of diversified investments to support TIAA’s contractual guarantees and business operations.
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