Trading ethanol with Brazil

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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.”

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:

  1. The world sugar price,
  2. The exchange rate of the Brazilian currency (the real) vs. the dollar and other major currencies
  3. The size of Brazil’s sugar crop
  4. Its government-controlled domestic gasoline price, and
  5. 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.

Summary:

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


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