Trading ethanol with Brazil
With that background, consider the current situation with the U.S. corn supply and the U.S. ethanol economy and policy. There should be no surprise to learn that Brazilian ethanol will be entering the U.S. market, particularly since the tariff disappeared nearly a year ago with the blenders’ tax credit. Similarly, in Brazil, Wisner says the ethanol economy is quite complex, “The economics of ethanol production, exports, and use for motor fuel in Brazil depend on a number of factors including:
- The world sugar price,
- The exchange rate of the Brazilian currency (the real) vs. the dollar and other major currencies
- The size of Brazil’s sugar crop
- Its government-controlled domestic gasoline price, and
- Tax policies.
The dynamic of sugar prices is seen in how much ethanol is consumed in Brazilian motor fuel. Wisner says it reached to about 90% of the volume in 2009, but in 2010 it declined to 55% because higher global demand for sugar caused more can to be diverted to sugar production and less to ethanol production.
As a result of the sugar price, the Brazilian government reduced the blend from 25% to 20%, and also eliminated its tariff on imported ethanol (from the U.S.) So, instead of exporting ethanol to the U.S., Brazil has been importing, but that will soon change with the change in global sugar prices and the shortfall of the U.S. corn crop.
For the first half of 2012, the U.S. was on pace to import about 182 million gallons of ethanol and export about 960 million gallons. Data since June is not available. For those first five months the corn equivalent of the imported ethanol would be 65 million bushels, but in late June a spike in imports pushed up that number to 145 million bushels of corn. Wisner says trade reports suggest that imports will increase and exports will decrease in coming months.
Another dynamic that will come into play is the California Air Quality Board, which has ruled that Midwestern ethanol is not welcome into that state, but Brazilian ethanol is welcome. The ruling, based on the Board’s concepts of greenhouse gas production, has been upheld by a lower court, but is being appealed to higher courts where rulings are uncertain.
While the U.S. ethanol industry is challenged with high corn prices, the Brazilian ethanol industry is in a constant state of flux driven by sugar prices, government taxes, and economic priorities for the nation’s sugarcane crop. Recently, Brazil had been importing more U.S. ethanol because of the profitability of exporting more sugar, but while that has changed about the same time as U.S. corn production dropped, there will be an expected shift in the ethanol exchange between the U.S. and Brazil.
Source: FarmGate blog