The ethanol economy remains strong and healthy, even without the blenders’ credit and the import tariff which expired at the end of 2011. There were few that would have imagined that several years ago, based on the strength of the lobbying efforts of the corn and ethanol associations. However, the lack of expected competition from Brazil has been the reason for today’s ethanol market. That market has U.S. ethanol being shipped to Brazil, just the opposite of what had been predicted. But how long will that be the case, and could it change?

Global ethanol production has increased substantially in the past decade to provide an alternative to fossil fuels, and many governmental policies around the world indicate that trend may continue, says a recent article in Amber Waves, an electronic magazine from USDA’s Economics Research Service.  Their focus was on Brazil, which is the world’s second largest ethanol producer, behind the U.. But Brazilian ethanol is produced from sugarcane, instead of corn or biomass. The reason is an increased capacity to produce cane and supportive government policies for the conversion to ethanol. “But Brazil will need to sustain production growth in the ethanol sector in order to meet increasing domestic demand and maintain its export share,” say the USDA economists.

But before ethanol, which was a large market for sugarcane in the 1970’s, was the global sugar market, and Brazil is the world’s largest sugarcane producer. With the introduction of ethanol, the conversion was easy with a good climate, abundant land and labor, public demand and public policies that were supportive. Continual production improvements have made sugarcane a large and profitable crop.  In 2010 ethanol was consuming 55 percent of the sugarcane being produced in Brazil. The allocation of how much sugarcane goes to ethanol and how much to sugar production is determined by cane millers based on expected sugar and ethanol prices and the market demand. There are 430 plants that convert sugarcane into ethanol in Brazil, a doubling of production in the past decade. 27 billion liters—7 billion gallons—of ethanol was produced in Brazil in 2010.

By 2008 Brazil was exporting 19 percent of its production, but that was a peak, and numbers have declined to 7 percent in 2010. But once a supplier of 62 percent of global exports, that volume has declined substantially due to strong domestic demand for ethanol and increased global sugar prices which pulled more of the sugarcane away from the ethanol refineries into the sugar refineries.

(Jib, one of the frequent commenters here suggested that a Brazilian policy toward increased sugar production would have a positive impact for the U.S. ethanol industry. He said, “World production of sugar, on average, may have a hard time meeting consumption. Brazil is projected to have to move from producing 1 in 5 pounds of the world’s sugar in 2006 to 1 in 4 by 2015. The increased sugar demand for non-fuel consumption may keep it out of fuel production. This may help keep US corn moving into US ethanol production. Brazil’s great plan of supplying the world ethanol could find a delay with the increasing food demand.”

In response, University of Illinois marketing specialist Darrel Good said, “World sugar production problems and high sugar prices have cut into Brazilian ethanol production for more than a year now and is on-going. U.S has picked up that ethanol export demand. Eventually, high sugar prices will result in surplus production and a return to Brazilian ethanol exports—just don’t know when.”

Brazil has government policies promoting ethanol, including flex fuel cars, mandatory blending targets, tax exemptions, and other incentives, along with incentives to sugarcane producers to ensure ethanol is produced. However, Brazil also has some long term plans for ethanol exports, helped by a target of increasing ethanol production by 45 percent over the coming decade. But the ERS economists say, “However, Brazil’s ability to provide the bulk of the world’s import needs will depend on its domestic ethanol demand, world sugar and oil prices, Brazil’s currency exchange rate, and the capacity of its infrastructure to move ethanol to ports.” 

World sugar prices are a key to whether Brazil becomes an ethanol competitor to the U.S.  USDA says, “When the sugar price is high, more sugarcane is used for sugar; lower sugar prices favor conversion of sugarcane to ethanol. In late 2010, when the world sugar price fell to under 14 cents per pound from a 29-year high of 30 cents per pound earlier that year, the share of sugarcane used for ethanol rebounded.”

The economists say in the future, sugar and crude oil prices will need to remain at levels that encourage ethanol production, if Brazil is to be an ethanol exporter. But as Darrel Good notes, high sugar prices will encourage higher production and Brazil may be producing both sugar and ethanol for export.

Summary:
Brazil has an abundant supply of sugar cane and has been a global supplier of sugar, as well as a recent supplier of ethanol made from sugar cane. Brazil had been seen as a significant competitor to corn-based ethanol in the U.S., but more US is being shipped to Brazil than is Brazilian ethanol coming to the U.S. Future pricing of sugar and oil will influence whether Brazil becomes a sugar exporter or an ethanol exporter.