An Economic Analysis of Land Use Changes and Sugarcane Production in Brazil: The Role of Irrigation Water

Brazil is the second largest producer and consumer of ethanol in the world. Nearly half of the liquid fuels consumed by light duty vehicles in the country is comprised by ethanol derived from sugarcane. Being the largest exporter, Brazil also plays an important role in the growing global biofuel markets. It is often argued that with a more efficient utilization of the pastures and by converting a small fraction of the vast amount of pasture lands to cropland, Brazil could increase its sugarcane and ethanol production further to meet the domestic and global ethanol demand. Sugarcane is a water intensive crop; therefore, significant amounts of irrigation water would be needed if sugarcane acreage expands beyond the traditional production areas. While the potential for expanding sugarcane area through livestock intensification and pasture land conversion has been investigated in a few previous studies, less attention has been given to the availability of water resources needed for such expansion. This paper presents a comprehensive approach and investigates the prospects for increasing sugarcane production in Brazil considering the competition between sugarcane and other crops for available land and water resources. A spatially explicit price endogenous mathematical programming model is developed for this purpose where the agricultural and transportation fuel sectors are simulated and equilibrium in commodity and fuel markets is determined in a simultaneous framework. The productivity in agriculture, the demands for major food/feed crops, domestic and export demands for ethanol, and irrigation water availability are projected for 2030 to carry out a prospective economic analysis. The model results show that without the consideration of irrigation water, livestock intensification can allow expanding the sugarcane production by nearly 150 percent compared to the base case (2007). However, when the water resources availability is incorporated along with the cropland limitation the potential for sugarcane expansion is reduced to merely 5 percent. These results demonstrate the important role of water resources and irrigation infrastructure development if Brazil targets a serious expansion in its ethanol industry.