THE STRUCTURE OF TECHNOLOGY IN BRAZILIAN SUGARCANE PRODUCTION, 1975-87 - AN APPLICATION OF A MODIFIED SYMMETRICAL GENERALIZED MCFADDEN COST FUNCTION

Sugarcane-based ethanol has become a primary automotive fuel in Brazil over the past 15 years. Because sugarcane costs are over two-thirds of the costs of ethanol production, the economic efficiency of this renewable petroleum substitute hinges on the structure of technology in sugarcane production. In this paper a modified symmetric generalized McFadden (SGM) cost function for sugarcane is estimated and the presence of technical change and economies of scale are investigated. The original SGM proposed by Diewert and Wales (1987) is modified to allow for fixed factors of production. This allows the cost function to be applied to processes which have fixed factors. The results suggest that there is no empirical evidence of economies of scale and very little technical change, only in the north of Brazil. The implications for the future economic efficiency of this petroleum substitute are discussed.