Trading ethanol with Brazil
When a 1973 shortage of U.S. soybeans resulted in an export embargo, our Japanese soybean customers helped establish Brazil as an alternate supplier. Now after many years of bitter competition with Brazil, many in the U.S. soybean industry hope Brazil raises a good crop to help supply global needs and prevent buyers from upsetting the U.S. soybean industry more than the drought already has.
The historic irony may not be lost on the ethanol industry as the U.S. and Brazil are engaged in a hot Latin tango over ethanol, but instead of global buyers contributing the demand dynamics, it is the economics and the government policies that are providing the dance music.
Due to its lack of crude oil resources, Brazil developed a fuel ethanol industry to power its love for the motor vehicle, and has a history of being the top global ethanol producer and deep experience in the engineering nuances for using various blends of ethanol fuel.
As crude oil prices have wrenched global economies, Brazil has been in a position to use its vast biomass production resources to generate exportable volumes of ethanol, says Iowa State University economist Robert Wisner. Just as ethanol and DDGS are co-products of the corn refining process, ethanol and sugar are co-products of cane-refining in Brazil. But with large ethanol production, the Brazilian government can mandate varying ethanol blends in the motor fuel from 18% to 25%, depending on the availability of ethanol. And that availability will be keyed on whether it makes more sense to use it domestically or to export it to the U.S..
Wisner says, “In October 2011, it was lowered from 25% to 20%, due to tight sugar and ethanol supplies. In August 2012, it was expected to remain at that level until at least the start of the 2013-14 sugar marketing year.” For motorists, the varying blend means varying pricing because petroleum is taxed and ethanol is not, a system that gave advantage to ethanol until June of this year when the gas tax was eliminated.
While the U.S. motorist is learning the term “flex-fuel” the Brazilian fleet is nearly all flex-fuel for new cars being sold.
As U.S. motorists have found a lower mileage for higher levels of ethanol blends, Brazilian motors have told Wisner, “Brazil has a large fleet of vehicles that can be powered by hydrous ethanol, a mixture that includes a small amount of water in ethanol and no gasoline. Alternatively, anhydrous ethanol can be blended with gasoline to create the 20 or 25 percent ethanol-gasoline blends. Motorists in Brazil have indicated to us that E-100 needs about a 30% price discount per liter to offset its lower fuel mileage than gasoline.”