Brazil's state development bank has announced billions of dollars in incentives to boost the country's sugar ethanol industry.
The move comes only days after the U.S. scrapped import tariffs on foreign producers of the biofuel.
The bank, known as BNDES, said it would lend $2.2-billion (U.S.) to the industry in a move that is expected to increase Brazil's sugar harvest and boost ethanol production by up to 17.5 per cent.
"With the increase in availability of the raw material, the expectation is that production of ethanol will rise by two billion to four billion litres between 2013 and 2014," BNDES said on Wednesday.
Moves by the Brazilian government to support its ethanol industry will anger rivals in the U.S., where budgetary considerations led to policy makers allowing a long-standing system of subsidy and import tariff protection for local producers of the fuel to expire on Dec. 31.
The removal of the U.S. protections was hailed as a great victory in Brazil. But critics point out that Latin America's largest economy will not be able to take advantage of the changes immediately because it lacks sufficient ethanol to supply its own needs, and was forced to import from the U.S. last year.
Brazil's sugarcane ethanol is more efficient and environmentally friendly to produce than U.S. corn-based ethanol, and the country has a bountiful supply of land, sunshine and water for its plantations.
"This [U.S.]decision [is a]historic decision for our sector," said Géraldine Kutas, head of international affairs at Unica, Brazil's sugarcane industry association.
She said the U.S. move would benefit Brazil only in the medium and long-term when it was able to boost its national harvest sufficiently.
Brazilian production of ethanol declined 17 per cent in the 2011-12 season, for the first time in a decade, to 22.8 billion litres. While it still exported 1.64 billion litres to the U.S., Brazil imported 1.66 billion litres, mostly from its North American rival.
The drop in Brazilian production was caused by the fallout of the 2008 financial crisis, which led to under-investment in the country's plantations. Domestic demand also increased on the back of rising car use in Brazil.
Unica calculates that Brazil will need to increase the area of sugarcane plantations from nine million hectares currently to 15 million in order to meet domestic demand and its target for exports to the U.S. of 15 billion litres by 2020.
The latest BNDES package is aimed at renovating or enlarging up to one million hectares of plantation. The bank said it believed that the loans would be directed toward ethanol production, given that many distilleries around Brazil were running under capacity because of financing problems.
Brazil's ethanol policy has already sparked fury in the U.S., where the Renewable Fuels Association (RFA) has called on the U.S. Chamber of Commerce to denounce what it calls "ethanol trade distorting policies" in the Latin American country.
The RFA pointed to Brazil's decision late last year to reduce the volume of ethanol that can be blended in petrol from 25 to 20 per cent, saying the move had "no other reasonable justification than to reduce the volume of U.S. exports of ethanol to Brazil."