May 26, 2012 Sweet Success

Volume 15 | Issue 2

When José Pessoa de Queiroz Bisneto left his generations-old family sugar business in Brazil’s northeast and went south

It wouldn’t be an exaggeration to say that José Pessoa de Queiroz Bisneto has sugar in his blood. For over two decades, Pessoa has been the president of Usina CBAA, a manufacturer of sugar and alcohol, headquartered in São José do Rio Preto, São Paulo. However, he’s also the great-grandson of the founder of Usina Santa Terezinha, once the largest producer of sugar in the world. There’s also the fact that he was born and raised in the northeastern Brazilian state of Pernambuco, where the cultivation of Brazil’s first cash crop dates back to the 16th century.

BUCKING TRADITION
Pessoa literally grew up surrounded by sugar. Usina Santa Terezinha, founded by his great grandfather in 1926, was but the jewel in the crown of his Pernambucano family’s sugar interests, which ranged from plantations to production plants. By the time he was 14, Pessoa was involved in the day-to-day operations of the business and had developed a real passion for it.

Sugar/alcohol is a highly cyclical industry, comprised of booms and busts that follow the rising and plummeting of the price of sugar on the international market and the subsequent oscillations in demand and supply. Such instability can make or break even the most experienced planters and producers and, in the late 1970s, a particularly rough crisis caused Usina Santa Teresinha to suffer badly. At the time, the family company had been passed down to so many successors that it was basically unmanageable.

Recognizing that it was also unsalvageable, José Pessoa Bisneto cut his ties to the family business and to his home state – but not to the sugar trade itself. Deciding to strike out independently, in the late ‘80s, he acquired his own plantations along with an ailing plant, in the neighboring state of Alagoas. Once he had the Alagoas plant up and running, he purchased a second facility in the adjacent state of Sergipe, in 1989. However, the most radical change occurred in 1991, when Pessoa added the Usina Brasilândia, located in the Central-West state of Mato Grosso do Sul, to the growing stable of sugar and alcohol processing plants that together comprised the Companhia Brasileira de Açúcar e Alcool (CBAA).

The purchase was a turning point that saw Pessoa trading the Northeast, with its centuries of cane cultivation, for the largely untapped, but incredibly promising opportunities being offered in the Southeast and Central-West of the country. “The truth is that everything from soil and climactic conditions to topography and rain patterns are much more favorable to sugar cultivation in southern Brazil than in the traditional growing regions of the Northeast,” confesses Pessoa. Even as early as the 1950s, a report published by the newly created Instituto de Alcool e Açúcar (Sugar and Alcohol Institute) had discovered that while production costs in the Northeast were higher, yields were lower. Despite the introduction of new technologies in subsequent decades, the fact is that 1 ton of cane milled in Pernambuco yields 140 kg of sugar compared with 160 kg in São Paulo.

Unsurprisingly, over the last few decades, sugar cultivation in the Northeast was largely propped up by government subsidies. When they ended in 1992, the vast majority of producer subsequently went belly up. “Fifty years ago, Pernambuco alone was the largest producer of sugar cane in the country,” says Pessoa. “Today, the production of the entire Northeast of Brazil barely adds up to 10 percent of the nation’s total.”

While Pessoa notes that agricultural conditions in the Southeast are superior to those in the Northeast, he recalls that when he made the move south, in 1990, he was surprised that, from an industrial perspective, the technology used for processing sugar and alcohol in the usually more developed states of São Paulo and Minas Gerais was inferior to that he had left behind. In fact, when visiting plants throughout São Paulo state, he was struck by the number of Pernambucano transplants who were on staff, sharing their know-how.

FACING CHALLENGES
In 2000, Pessoa purchased his own São Paulo plant, in the town of Icém, along with another unit in Campos de Goytacazes, located in Rio de Janeiro. A fifth plant, acquired in 1996 and also located in Mato Grosso do Sul, completes CBAA’s current stable of five units – (the company sold off its original Alagoas plant in 1992) – which presently employ a total of 4,500 people.

Despite the constant up and down cycle of the sugar/alcohol sector, over the last decade, the company has enjoyed overall growth. In 2011, CBAA milled a total of 3.5 million tons of cane and produced an estimated 200 million liters of alcohol and 100,000 tons of sugar. In terms of total production capacity, the company – whose 50,000 hectares of cane fields supply 80 percent of its needs – is equipped to mill up to 6.5 million tons of cane annually and produce 320 million liters of alcohol and 200,000 tons of sugar.

CBAA’s alcohol – 65 percent of which is anhydrous and 35 percent of which is hydrated – is commercialized entirely within Brazil. Indeed the domestic market is growing at such a rate that local producers aren’t able to meet demand, forcing Brazil to rely on imports from abroad. In contrast, 60 to 70 percent of the sugar produced by CBAA is exported overseas in the form of VHP (very high polarity) sugar, while the remaining 20 to 30 percent is sold, in crystal form, at home.

As has been the case for most Brazilian exporters, the sugar sector has been hit hard by the recent valorization of the Brazilian real and drop in the U.S. dollar. “Most currencies have increased against the dollar in recent years,” Pessoa concedes. “But the real has risen much more sharply than the currencies of other sugar exporters. Until recently, in terms of cost, Brazilian sugar was always the cheapest on the market. Today, however, it’s only the fourth cheapest.”

The exchange rate hasn’t been the only challenge CBAA has faced in recent times. The global economic crisis of 2008 resulted in a major drop in demand from which the company is only beginning to recuperate. “Since 2009, we’ve once again enjoyed growth, but it’s been incremental,” confesses Pessoa. “Between 2010 and 2011, our revenues grew by only 5 percent. This year, however, we expect to grow quite a bit more, and by next year we hope to exceed growth rates of 15 percent.”

However, undoubtedly the biggest – and most permanent – challenge facing the company today is the radical transformation of the sugar/alcohol sector as a whole due to the arrival of a new group of large multinational players. Pessoa, who has been carefully accompanying the changes, identifies three main interest groups, each with its own specific motivations: commodity trading firms such as Bunge, Cargill, Noble, and Glencore; oil companies such as BP, Shell, and Petrobras, and international sugar producers such as India’s Renuka and Europe’s Tereos. “The globalization of the sugar/alcohol sector in Brazil is the new wave,” says Pessoa. “Today multinationals mill 40 percent of all the sugar cane here.”

Due to their size – and access to capital – competition is fierce for small local producers such as CBAA. “Competing against companies that have lower capital costs means we have to find way of producing more efficiently,” says Pessoa. Fortunately, CBAA does have some aces up its sleeve. “Unlike most of these multinationals we understand Brazilian culture. We also have decades of expertise in this sector, in terms of both the agricultural and industrial sides of the business. Due to our many R&D partnerships with some major Brazilian universities, we’ve been able to develop cutting-edge technology and new processes applicable to every area of cultivation and production, which helps us stay ahead of the curve.”

Nonetheless, the company is presently looking to enter into a partnership with a large multinational in which CBAA would have access to capital for investment purposes while its global partner could benefit from its efficiency and on-the-ground expertise. Pessoas model is the joint-venture relationship between Shell and Cosan. Instead of outright purchasing the São Paulo-based sugar and alcohol producer, Shell invested capital in exchange for the Brazilian company’s experience; together the two created a new company, Raízen, focused on the development of ethanol for the international market.

“Unlike other companies, we don’t want to diversify; we’re 100 percent focused on producing sugar and alcohol,” declares Pessoa. “In Brazil, growing and producing sugar is more than just a business’; it’s a way of life and a culture. I grew up in this culture and today it still remains inextricably linked to our company’s philosophy. At CBAA, producing sugar and alcohol isn’t just a job; it’s a passion.”

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