Jamaica Broilers' foray into the ethanol market has hit a snag with the company facing a number of start-up challenges, most notably a breach of contract with its purchaser of ethanol, Integra Ltd.

Jamaica Broilers had agreed to sell ethanol to Integra Limited at a fixed price when the biofuel was fetching US$2.10 per gallon on the world market. The company, headed by Robert Levy, had calculated that its ethanol operations would net it US$4 million per year, which converts to US$1 million per quarter.

However, with a proliferation of suppliers and US midwest farmers turning to corn ethanol production, world ethanol prices began to fall precipitously.

With the price of ethanol falling to US$1.70 per gallon, Integra opted to renege on its agreement with Jamaica Broilers, forcing the company to resort to the open market.
This resulted in it racking up a loss of US$1.93 million. Last month, Integra agreed to settle with Jamaica Broilers for 75 per cent of the loss that cemented to US$1.45 million, which served as a reprieve of sorts but no doubt has hurt the group's financial performance for the second quarter. Last year, the group projected a profit before interest of J$800 million. With its ethanol operations coming on stream for 2007/08, the group projected a profit before interest of J$1.065 billion, a difference of J$265 million or US$3.9 million (at an exchange rate of J$68 to US$1).

Jamaica Broilers invested J$1.1 billion on an ethanol production plant with a rated capacity of 60 million gallons per year (mgpy). With plant downtime (delays, plant maintenance), raw materials arriving late and other challenges, the group projected that its plant rated capacity would be revised to two thirds that sum, which translates to 40 mgpy. This would give it a net operating margin of US$0.10 a gallon.

The second quarter has proven to be a roller coaster. In July, its profits were negatively impacted by a late plant start-up of six weeks and it having to pay late penalty charges. August saw it renegotiating contract terms, but the impact of Hurricane Dean at the end of the month further prohibited the operations of the plant. Exacerbating matters further was a 35 per cent reduction in the quantity of ethanol contracted as well as a four per cent reduction in the price of the ethanol.
At that time Jamaica Broilers was looking at profit for that quarter of just US$250 million, a far cry from the projected US$1 million for the period under review.

September proved a better month for the Jamaican outfit. After renegotiating contracts and tightening its operations, the company is projected to make US$750,000 for September.

Having got back on track, Jamaica Broilers ran into a firestorm concerning its executive incentive programme (a payment of 5.7 million shares to executives) and share trading, which caused a few eyebrows to be raised. At a shareholders briefing held earlier this month, it sought to set the record straight and strenuously refuted that anything untoward took place. Jamaica Broilers' vice- president for finance & corporate planning, Ian Parsard, said that over the last two years Jamaica Broilers has issued to executives approximately 13 million shares (part of the incentive programme) of which eight million has been traded over the same period. The group's chairman, Danny Williams, speaking with Caribbean Business Report, said: "Of all the companies that I have been involved with over the years, I can tell you that Jamaica Broilers exhibits the highest standards of transparency, corporate governance and moral propriety. Nothing untoward took place here and I am sure that the Jamaica Stock Exchange knows this."

Despite the trying times, Jamaica Broilers has reposed much faith in its ethanol operations. Group CEO Robert Levy said: "We had a spare J$2 billion available to us and we wanted to utilise that. Now it would have been easy for us to just sit on it, or put it on government paper, but no, we are producers and when the idea of going into ethanol production came up, we immediately saw its potential and how it could bolster the group. Jamaica Broilers Ethanol Limited is a subsidiary that brings value added to the entire group."
So why ethanol?

With emerging economies hungry for energy sources to boost their ever-growing economies, the US now looking to cleaner fuels and the Caribbean desperately in need of cheaper energy which does not impose too heavily on its foreign reserves, an investment in ethanol seems a good bet.
Fuel ethanol consumption has grown significantly in the past several years and it will continue to grow with the establishment of renewable fuels standard in the Energy Policy Act of 2005. This standard requires US gasoline to contain a minimum amount of renewable fuel, including ethanol.

US domestic refiners producing ethanol from American corn supply most of the US market. However, imports do play a role, albeit small, in the US markets. One reason for the relatively small role is a 54 cent per gallon tariff on imported ethanol. This tariff offsets an economic incentive of 51 cents a gallon for the use of ethanol in gasoline.

However, to promote development and stability in the Caribbean region and Central America, the Caribbean Basin Initiative (CBI), allows the imports of most products, including ethanol, duty free. This convinced Jamaica Broilers it is in close proximity to the world's biggest market and gets a duty waiver.

Ethanol entering the US under the CBI is generally produced elsewhere and reprocessed in CBI countries for export to the US.

To promote its use, ethanol-blended gasoline is granted a significant tax incentive. However, this incentive does not recognise point of origin, and there is a tariff on most imported ethanol fuel to offset the exemption. But a limited amount of ethanol may be imported under the CBI duty free, even if most of the steps in the production process were completed in other countries.

According to the US International Trade Commission, roughly one-half of all fuel ethanol imports to the US came through CBI countries between 1999 and 2003. In 2004, imports from Brazil to the US grew dramatically, but in 2005, CBI imports again represented more than half of all US ethanol imports.

In total, imports play a relatively small role in the US ethanol market. Total ethanol consumption in 2005 was approximately 3.9 billion gallons, whereas imports totalled 180 million gallons, or about five per cent. Imports from the CB1 totalled approximately 2.7 per cent.

Last year, when ethanol imports were at an all-time high, ethanol coming into the US under the CBI duty-free quota peaked at 206 million gallons. That was about 75 per cent of such imports allowed through those countries last year.
Trade rules allow pass-through ethanol to equal no more than seven per cent (268 million gallons) of US ethanol consumption. This leaves plenty of room for Jamaica Broilers to net US$4 million a year from its ethanol operations.
Brazil has largely attained energy self-sufficiency as a result of cane ethanol production. It has spent billions of dollars over decades of research to develop the technology to mass-produce ethanol from the millions of cane acres spread along the South American landscape.

Ethanol accounts for 40 per cent of total fuels used by non-diesel-powered vehicles in Brazil and represents a 30 per cent reduction of greenhouse gas emissions from the transport sector, the Brazilian cane industry association (UNICA) said.

"In 20 years, I doubt there will be a gasoline car on the Brazilian market. They will all be powered by ethanol," UNICA President, Eduardo Pereira Carvalho, said during a Reuters Global Biofuel Summit last week.

Brazil began its ethanol programme 30 years ago when it was importing nearly 90 per cent of oil needed for domestic use.

UNICA estimates that Brazilian cane ethanol on average yields more than eight times more energy than is used in the production process, compared with US corn ethanol production that yields between 1.1 and 1.7 times as much energy. This advantage should improve with the use of state-of-the-art technologies in Brazilian mills.

The European Union, which has proposed the use of 10 per cent biofuels for transport by 2020, signalled it will demand proof from suppliers that the product was made in a sustainable manner, a requirement that may rule out US ethanol.

In the US, experts debate whether biofuels growth in the Caribbean and Brazil will cut into profits for Midwest producers, particularly with the Caribbean's special free trade agreements which makes it less expensive to ship the product to the US coasts.

"I don't think there is an answer right now," said Douglas Newman, who studies ethanol for the US International Trade Commission.

"As far as the Caribbean being a threat, it's been around for a long time, but it's never amounted to much and the demand has been there."

Under the stewardship of Robert Levy, Jamaica Broilers, renowned for its chicken operations, has become a Jamaican company looking for opportunities in the 21 century. Many local companies continue to be left behind because of a reluctance to adapt to and embrace the modern era. Jamaica Broilers has boldly respended to the demand for cheaper energy. It is unfortunate that as world ethanol prices decline, oil prices are racing to US$90 a barrel. This may well prove a temporary aberration with ethanol prices staging a rebound. What cannot be doubted is the need for alternative fuels, and with Brazil unable to profit from the CBI breaks, an operator like Jamaica Broilers stands to do well.

The last few months have been challenging, but as Jamaica Broilers attains experience in this new business, its decision to become an energy provider should pay off. Last Thursday, Jamaica Broilers' share price stood at J$4.04. Yesterday it climbed marginally to J$4.11.

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