June 26, 2010 Organic Growth

Volume 13 | Issue 3

Brazilian sugar and alcohol producer Jalles Machado is small in scale but large in ambition: the Goiás-based company successfully combined h

Typically, profit prospects drive business development. Jalles Machado represents a compelling alternative. This business was created to provide much needed jobs in a Brazilian agricultural community that fell upon hard times.

The narrative begins in 1980: The municipality of Goianésia (located in the Central-West Brazilian state of Goías) was reeling from tumbling prices for livestock and other agricultural products – a development that left many inhabitants without work and even food. It sought to avert catastrophe. Rising to the challenge, Mayor Jalles Fontoura de Siqueira and his father, Otávio Lage de Siqueira (an entrepreneur and former state governor), teamed up to create a business that would jumpstart the local economy and ensure a livelihood for inhabitants.

EARLY UPS AND DOWNS
It wasn’t easy. At the time, Brazil suffered the throes of a global oil crisis. Seeking cheaper fuel alternatives, the federal government threw itself behind the production of ethanol derived from sugar cane alcohol. Taking advantage of Proálcool, a national program designed to subsidize and stimulate the production of ethanol, the Siqueiras created Goianésia Álcool, initially producing cane-derived ethanol along with alcohol for medical and domestic use.

By 1983, the company – renamed Jalles Machado in honor of Otávio Lage’s father – grew and harvested its own sugar cane. It soon absorbed the local labor force and became an important component of Goiás’ burgeoning economy. However, by the end of the decade, low oil prices and dwindling government support caused the ethanol market to dry up. “Suddenly ethanol was no longer proved a profitable business for us,” recalls Henrique Penna de Siqueira, Jalles Machado’s operations director (and grandson of Otávio Lage). “In need of a quick solution, we invested in a sugar factory. In 1993, we began producing crystal sugar. This gave us a lot more flexibility and fostered our continued and consistent growth during the next five years.”

And grow it did: By 1998, the company was harvesting 1.4 million tons of sugar cane a year. But only a year later, sugar prices plunged by 50 percent. To break even, the company implemented radical cost-cutting measures and production changes. In 2000, Jalles Machado was only harvesting 950,000 tons of cane.

However, the crisis contained a silver lining: It compelled Jalles Machado to streamline its activities and rethink its planting and harvesting methods. The company heavily invested in cane field recuperation, focusing on elements such as soil quality and high-yield technology. It also began investing heavily in energy generation from bagasse (sugar cane’s fibrous residue). Soon, the company resumed, and even surpassed, previous production levels.

SUSTAINABLE SUCCESS
Siqueira takes up the narrative: “In 2002, we began to invest seriously in generating our own electricity. We started with a small generator capable of producing seven MWs per hour. From there, we just kept going.”

A year later, the company retrofitted its boiler, which increased capacity to 28 MW/hour. “In 2006, new investments allowed us to increase output to 40 MW/hour,” continues Siqueira. “Today, 30 percent of bagasse-produced energy supplies all of our energy needs. The rest we sell to the national energy network, whose needs are growing exponentially.”

Development of new energy sources is a major priority in Brazil, as its economy has busted out in recent years. Siqueira underscores the importance: “As a rule, energy demand is usually twice that of the economy’s growth rate. And, this year, we anticipate Brazil’s economy will grow by six percent.”

Doing simple math, that means energy demand will increase by 12 percent. But meeting that demand is not as simple. “The challenge is to meet the demand in a sustainable fashion,” says Siqueira.

Indeed, the company considers the welfare of its workers and the surrounding community, and environmental preservation, just as important as financial matters. But this is nothing new. “Social and ecological concerns have always been of prime importance to us,” reveals Siqueira, pointing out that in 1995, Jalles Machado created its own internal environmental commission, whose goal was the preservation of the surrounding Cerrado biome, a unique, yet tragically neglected ecosystem that encompasses much of the Brazilian Central-West region. Its initial “Ame A Ema” (“Love the Ema”) campaign focused on saving the Cerrado’s largest inhabitant: the ema, an ostrich-like bird that once teetered on the edge of extinction. But thanks to Jalles Machado’s efforts, the species’ population no longer remains at risk.

As such, it should come as no surprise that, throughout the years, the company received numerous prizes for its responsible environmental citizenship. Perhaps the most important was the 2008 award received came from the National Water Agency. The honor recognized the company for its clean water policy (and, at the same time, placed it above industry giants such as Petrobras, Natura, and Vale). “For us, sustainability is paramount,” declares Siqueira. “It strongly factored into our 2003 decision to initiate our organic sugar production.”

That process, he indicates, involves cane cultivation that eschews usage of chemical fertilizers or pesticides. Further, processing is accomplished without industrial chemicals such as sulphur and polymers, he adds.

As a result of its dedication, Jalles Machado is currently the world’s second largest producer of organic sugar. Moreover, organic sugar production paved the way for the company’s expansion into export trade. Indeed, demand for this relatively higher priced item is largely international, and the company meets the need. “Only about two percent of our organic sugar sales are domestic,” indicates Siqueira. He adds that organic sugar exports comprise 10 percent of the company’s total revenues and 25 percent of all of its sugar sales. In the large picture, those figures represent a sizeable chunk. “The biggest market is the United States, which purchases 80 percent of our product. European clients account for the remaining 18 percent of sales,” says Siqueira, placing the activity in a global context.

NEW OPPORTUNITIES, LASTING IMPACT
Even with this success, Jalles Machado is currently more excited about the new opportunities related to ethanol. Witnessing a major increase in Brazilian flex fuel vehicle production, Jalles Machado is once again betting a lot on ethanol for the domestic market. Siqueira offers a revealing comparison: “International sugar market growths are steady albeit small, and two to three percent a year. Further, results really depend on production levels witnessed in other countries such as India, China and Thailand. Thus, the potential is not that great. Conversely, the ethanol market experiences double-digit growth. In Brazil, the market is recording 15-percent annual growth.”

And that’s not the only attractive feature. “We believe that international consumption will take off in the near future, creating enormous opportunities for growth,” says Siqueira.

Currently, 40 percent of Jalles Machado’s revenues derive from ethanol while 50 percent results from sugar sales (crystal, VHP, and organic). Energy accounts for seven percent. The remaining three percent is divided between yeast and other biproducts. With such diversity, the company is enjoying robust growth rates. Between 2006 and 2008, annual sugar cane harvests increased from 1.9 million to 2.4 million tons. The company anticipates that this year’s harvest will yield at least 2.8 million tons. Tonnage potentially translates in 210,000 tons of sugar, 100 million cubic meters of alcohol, 2,800 tons of yeast, and 110,000 MW of exportable energy.

To harness such growth potential, Jalles Machado has poured dollars into technology. Consequently, 90 percent of the cane arising from its 38,000-hectare plantation is mechanically harvested. At the same time, the move toward mechanization wasn’t an easy decision for a company whose mission statement indicates its dedication to supplying jobs for the local workforce. No doubt conflicted by profit margin and social responsibility, Jalles Machado assuaged the painful cross-purposeful approach by investing in a rubber tree plantation in Goianésia, where laid-off sugar workers could find a new, and lucrative, livelihood. As a result of Jalles Machado’s efforts, Goianésia region is now the second-largest single producer of latex in the country.

Investments in technology have been accompanied by investments in cultivation and production facilities. In 2008, Jalles Machado purchased a 90-hectares estate in Goianésia and constructed a state-of-the-art production facility. When completed at the end of this year, the Otávio Lage Unit will have the capacity to mill 1.5 million tons of sugar cane a year, 100 percent of which will be harvested mechanically. An electric generator will produce 36 MW of energy (27 MW of which will be exported).

“Ultimately, Jalles is a small business that harvests and processes a small volume of sugar cane,” points out Siqueira. “And yet, despite our modest scale, we’re big in terms of managerial, commercial, agricultural and industrial prowess. In recent years, we’ve achieved considerable growth. However, what’s most important – and lasting – is that the work we do has a meaningful impact on the industry, the environment and on society at large.”

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