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Crop Plans and Controls on Production Levels

Between 1995 and 1996, several provisional measures were issued in order to regulate the supply of sugarcane and ethanol to the market. According to those measures, the crop plans would still be devised by the Ministry of Industry, Trade and Tourism (MICT), with the objective of controlling the production of sugar and ethanol. The MICT was responsible for setting the production levels for sugar and ethanol commensurate with the quantity needed to supply the markets in the south-central and northeastern regions, as well as to replenish the stockpiles.

The need to import products in order to meet the domestic demand would also be determined by the MICT, via the crop plans. In the case of ethanol, such decisions were made jointly with the National Department of Fuels.

The signs that the government would soon lift price controls on the sugar–ethanol industry led a contingent of producers to move in that direction. However, it is interesting to note that, even during the 1996–1997 harvest season (after the deregulation process had already begun), the industry was still heavily regulated, in terms of the production and marketing of sugar and ethanol.

The price per ton of sugarcane, standard raw sugar, hydrous ethanol (for fuel or industrial purposes), and the residual sugar, as well as taxes on raw materials in each region, were set by Ministry of Finance Directive no. 110, issued in May 1997. Until the 1997–1998 harvest season, a crop plan continued to be disseminated (as per MICT Directive no. 46, issued in April 1997). The plan established production levels for sugar and ethanol in the northeastern and south-central regions (the two major producing regions), as well as setting the quantity of exportable surplus that was exempt from tariffs (tariffs on exports were eliminated in May 1997, by joint order of the MICT and the Ministry of Finance). According to Carvalho,Footnote 1 the crop plan was totally disconnected from market reality, allowing unnecessary (private) imports of fuel ethanol and imports of methanol by the energy company Petróleo Brasileiro (Petrobras, Brazilian Petroleum), leading to high surpluses that eventually (in 1998) created one of the biggest crises ever experienced in the sugarcane–ethanol industry, highlighting the difficulty of the government in continuing to intervene in the sector.

Regulation of the National Fuel Supply

In June 1998, with the deregulation process well underway, the government enacted Provisional Measure no. 1,670, which was later regulated by presidential decree, establishing the rules for the monitoring of activities related to the national fuel supply, as well as setting administrative penalties for various infractions. The Agência Nacional do Petróleo (ANP, National Petroleum Agency) was responsible for supervising activities related to the petroleum industry and the national fuel supply (in accordance with Law no. 9,748, passed in August 1997).

Provisional Measure no. 1,670 gave the executive branch the authority to set prices and establish production levels, as well as to control the marketing of fuel ethanol and of sugarcane, as had previously been done by the IAA, which had by then been extinct for nearly 10 years. The Measure also provided that the executive branch could establish a committee to promote the monthly allocation, in production units, of requests for fuel ethanol purchases from the distributors of liquid fuels. According to Coral (1998), the Measure spelled a setback for the sector. The author noted that 60 % of the sugarcane fields were dedicated to the production of ethanol, and the price of the sugarcane harvested from those fields was therefore subject to government tabulation. The remaining 40 % were used for the production of sugar, and the sugarcane thus produced was not subject to price controls. Consequently, the price that a sugarcane supplier would receive per ton of sugarcane was either free or tabulated, depending on the type of production undertaken at the facility. This view was also shared by the president of the Cosan group,Footnote 2 who considered the Measure ineffective, noting that the government would not be able to supervise the production and marketing of ethanol, which was confirmed by the chairman of the ANP Board of Directors, Paul Lima.Footnote 3

Exports of Sugar

The provisional measures issued in the mid-1990s made it so that the crop plans would set the proportion of the surplus sugar (the production exceeding the demand of the regional domestic markets) that could be exported, as well as setting an export limit for each sugar mill. A sugar export tax was imposed and was set at a rate of 25 %, which could be raised or lowered by the executive branch, via the National Monetary Council. Those measures also established provisions by which exports could be totally or partially exempted from this tax, by joint order of the MICT and the Ministry of Finance. Tax-exempt exports of sugar (or ethanol) were subject to the limits assigned by the respective firms in the annual crop plans, as well as being potentially subject to periodic, regional public offerings. In addition, the following operations were exempted from export tax (within certain limits): those in which the authorization to produce sugar for the export market had been granted to companies located in northeastern region by the then-defunct Ministry of Regional Integration (valid for shipments made up until August 31, 1995); the exportation of sugar to the preferred market (the USA) in the volumes previously authorized (valid for shipments made up until September 30, 1995); and previously authorized exports of sugar that were linked to ethanol import operations already undertaken.

It should be noted that, despite its liberal discourse, the federal government, through the MICT, sought to maintain control over the sugarcane industry. At that time, sugar exports from the northeast were still at an advantage, because the exportable surplus of the region was exempted from the export tax.

However, the structural weakness of the MICT precluded effective planning, as well as effective monitoring, within the sector, providing further evidence of the difficulty the government had in maintaining the traditional model of intervention. Therefore, the federal government could find no mechanisms that would enable the logic of regulating the volume of sugar exports, prompting it to impose tariffs on such exports.

At that time, the sugar producers in the south-central region, whose level of production had effectively increased, resulting in surpluses, had been lobbying for the lifting of controls on exports, whereas those in the northeast (where there was a balance between supply and demand) preferred to maintain the system of set export volumes. Several legal measures filed by the producers in the south-central region and supported by the Federal Constitution of 1988 put added pressure on the federal government at that time.

Despite the demands of the sugar producers in the south-central region regarding exports, Provisional Measure no. 1,476-15, issued in September 1996, continued to favor exports from northeastern region by reaffirming what had previously been established by Law no. 4,870 (passed in December 1965): the volumes of sugarcane industry products destined for export to the preferred (the USA) market were assigned to the northeastern region, by virtue of the lower level of socioeconomic development in that region. In December 1996, Provisional Measure no. 1,476-15 was converted into Law no. 9,362.

The federal government was not in the most comfortable position at that time. In addition to not having the structure needed in order to impose its control over the sugarcane–ethanol industry, the government had taken measures that were in conflict with the Federal Constitution of 1988, which exposed it to legal action and challenges from producers in the south-central region, who already accounted for 85 % of the sugarcane production in the country at that time.

Finally, in May 1997, by Ministerial Directive of the MICT and the Ministry of Finance, the sugar export tax rate was reset to zero, thus altering the system of export volumes that were exempt from tariffs (established for the 1997–1998 harvest by Directive no. 46, handed down in April 1997). This measure, in addition to increasing revenues from exports, which improved the trade balance, had long been expected, because the existing system of setting the quantities of exports that were tax-exempt had a negative effect on the most competitive companies.

It should be noted that, although the sugar export tax rate is now zero, it still exists. The government can increase it (up to a maximum of 40 %) as needed (e.g., to ensure the supply of the domestic sugar or direct the production of export sugar to ethanol, to ensure the supply).

Differential Application of the Industrialized Products Tax on Sugarcane

Another government policy provoked the producers in the south-central region to file a number of injunctions against the government. The policy in question was that of standardizing the price of sugar nationwide. In order to equalize the price between the two major producing regions (sugar mills in the south-central region, because they were more competitive, had, and still have, lower production costs), the Imposto sobre Produto Industrializado (IPI, Industrialized Products Tax) came to be imposed on sugar, as of 1992.

Decree no. 420, handed down in January 1992, dictated that the output of all sugars (with the exception of amorphous sugar) would be taxed at different rates by region: the rate would be 18 % for the south-central region; 9 % for the states of Rio de Janeiro and Espírito Santo; and 0 % for the regions controlled by SUDENE and SUDAM.

Several legal challenges were filed by the producers in the south-central region, who had not paid the IPI or deposited its value in escrow. In 1995, in accordance with Ministry of Finance Decree no. 189, the regional IPI rates were retained, but the type of sugar on which they focused was changed, only standard raw sugar then being subject to price standardization. Until November 1997, those were the rates that prevailed. The IPI and the system of applying it differentially were still grounds for frequent legal challenges by the producers in the south-central region, who continued to refuse to pay the tax or to set aside the funds with which to pay it.

In November 1997, Decree no. 1,602 set the IPI to a single rate of 12 % for all regions. However, Decree no. 2,501, issued in February of 1998, in order to “balance the tax burden among the various sugar producing regions,” stated that, although the rate of 12 % was applicable to all regions, some regions (those in which production costs were higher) could deduct a certain percentage of the IPI to be paid. According to the Decree, sugar producers in the northeastern region could reduce their IPI by up to 85 %, resulting in a rate of 1.8 %. For producers in the states of Rio de Janeiro and Espírito Santo, the discount could be up to 30 %, reducing the rate to 8.4 %. The other states in the south-central region (including São Paulo) would not be allowed any discount. The court battles continued, and, in practice, the vast majority of producers did not pay the IPI or put the corresponding amount in escrow. What little IPI was collected was on sales made by the soft drink industry.