Factors influencing ethanol mill location in a new sugarcane producing region in Brazil

Abstract The rise in global demand for ethanol has caused an expansion of ethanol mills into new areas to increase supply. Ethanol mills are supply-oriented firms; thus, they seek locations near agricultural feedstocks to ensure access and to reduce transaction costs. In Brazil, the rise of ethanol production has been more significant in the states of Goias and Mato Grosso do Sul. Expansion of the sugarcane ethanol industry into this new frontier is a challenge because sugarcane is not a traditional crop in this region. The purpose of this paper is to understand the factors determining the location decision of ethanol mills in new producing areas. For the analysis, we focus on the new sugarcane ethanol plants in Goias and Mato Grosso do Sul, we developed a probit and a spatial autoregressive probit model that incorporates agricultural conditions, distance to markets, infrastructure, and policy. The results indicate that counties with agricultural tradition have a higher probability of a mill locating there (0.0918). The presence of rural syndicates in a county increases the likelihood of a mill deciding to locate in that county by 0.083. The county's distance to an operating mill in 2002 decreases in 0.00006 the probability of a new mill locating in that county. Policymakers should focus on policies that promote the institutional organization of producers, development of the transportation infrastructure, and utilize the agricultural tradition to attract new mills.