High energy prices fuel investor interest in Brazil's idle biofuel capacity

NEW YORK, June 8 (Reuters) - High ethanol and sugar prices have investors looking into merger deals in Brazil, where a lot of idle biofuel capacity could be put to work to help boost tight global fuel and food supplies.

"Brazil is the Saudi Arabia of sugarcane, there is inexpensive unused capacity. That is the investor dream," said Craig Tashjian, managing partner at U.S. investment fund Amerra, which has been expanding into Brazil's sugarcane and corn-ethanol sector.

"I'm very positive about the investment opportunity there."

Amerra holds stakes in six Brazilian companies including the country's largest corn ethanol producer FS Bionergia. It has a 36% stake at holding company Tapajos, which owns 23.7% of FS.

Brazil is the world's largest sugar producer and second largest in ethanol, but nearly 30% of its sugarcane crushing capacity is idle because of financial difficulties faced by smaller companies. Investors and bankers said numerous deals are being negotiated, with large companies hoping to snap up struggling smaller players that are running below capacity.

Henrique Penna, chief commercial officer at sugar & ethanol company Jalles Machado SA (JALL3.SA), which went public last year and made its first acquisition in May, said around 40 plants are being offered for sale.

"In the final stage of the (acquisition) process, we identified at least eight good targets," he said, adding that current prices for sugar and ethanol have drawn sellers and buyers to the market.

Sugar prices are trading near a five-year peak, while ethanol prices in Brazil are near all-time highs.

Penna said Jalles is not looking for another mill for now, but said one of the plants they looked into, IACO Agricola, controlled by banker Andre Esteves and by the Grendene group, is being offered in the market by BTG Pactual.

Asked about the mandate, BTG Pactual declined to comment.

The last two years have improved companies' financial situation after years of underperforming, due to higher prices, said Andre Cury, head of commercial banking for Citi in Brazil.

"EBITDA numbers rose a lot and they managed to cut debt. The companies are in a better shape now," he said.

Overall, there is spare cane crushing capacity in Brazil because lower sugar and ethanol prices in the previous decade reduced the sugarcane area as farmers switched to more profitable crops such as soybeans and corn.

Brazil center-south mills have capacity to crush around 840 million tonnes of sugarcane per year, according to industry group Unica, but this year's crop is projected at only around 540 million tonnes.

The mill Jalles Machado bought, for example, has a crushing capacity of 2.7 million tonnes, but is currently only crushing 2 million tonnes, Penna said.

There is room now for the sugarcane crop to grow in coming years due to hot demand for ethanol, said Pedro Fernandes, agribusiness director for investment bank Itau BBA. He believes the crop migration from cane to grains has ended.

"Current prices make sugarcane very profitable, both for farmers and for processors," he said, projecting that Brazil's sugarcane planted area could grow in 2023, 2024 and 2025.

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