U.S.-Brazil ethanol swap seen in ’12

Source: PHILIP BRASHER • Des Moines Register  • Posted: Monday, January 9, 2012

WASHINGTON — The ethanol subsidy may be history, but government policies can still produce crazy economics in the biofuel business.

Exhibit A: Brazil and the United States, the world’s two largest producers of the gasoline additive, are expected to swap some of their supplies this year.

Last year, Midwest ethanol producers shipped an estimated 250 million gallons of their product to Brazil, which ran short of the biofuel for its domestic market. Production in Brazil has fallen amid high sugar prices and a succession of poor harvests.

But Brazil still shipped a small amount of ethanol to the United States in 2011, and exports are expected to increase this year because of U.S. regulations that rate the Brazilian biofuel that’s distilled from sugar cane as better for the environment than the U.S. version made from corn.

“We would rather that our ethanol be burned here in this country. We feel it’s a domestic fuel,” said Jim Seurer, chief executive officer of Glacial Lakes Energy LLC, which started shipping ethanol to Brazil last spring from its Mina, S.D., plant. Until then, much of the distillery’s output had been shipped to California, but Brazilians were willing to pay a higher price, Seurer said. “We’ll continue to ship there if it’s profitable.”

It’s unclear how much ethanol the United States will import from Brazil this year. The Energy Department has estimated that it could be as much as 300 million gallons, while some in the U.S. industry think the amount could be less. But the fact that the countries would be swapping ethanol at all strikes many as bizarre.

“It just defies common sense,” said Geoff Cooper, vice president of research and analysis for the Renewable Fuels Association.

A boom in ethanol exports to Brazil and elsewhere is a key reason the U.S. biofuel industry has largely shrugged off the end of the 45-cent-per-gallon ethanol subsidy and the 54-cent tariff on imported ethanol. Both the subsidy and the tariff expired Dec. 31.

Final numbers on 2011 exports aren’t in yet. But they’re expected to total about 1 billion gallons, including the shipments to Brazil, Cooper said. Exports totaled about 400 million gallons in 2010.

Brazilian ethanol, which was traditionally cheaper than the U.S. product, currently costs about 70 to 80 cents a gallon more, said Cooper.

The exports came at a critical time for U.S. producers, who are facing a saturated domestic market. Virtually all gasoline sold in the country contains at least 10 percent ethanol, the maximum that has traditionally been allowed by the Environmental Protection Agency. The agency is moving toward raising the limit to 15 percent, but stations are expected to be reluctant to offer the higher blend, since only cars and trucks made since 2001 will be allowed to use it.

U.S. production of corn ethanol is believed to have reached a record 14.5 billion gallons in 2011.

The export sales “enabled just about any producer to make money in ethanol last year,” said Todd Becker, president and chief executive officer of Green Plains Renewable Energy, which operates nine ethanol plants, including three in Iowa.

The U.S. industry got good news Dec. 29, just two days before the subsidy and tariff expired, when a federal judge blocked California from continuing to enforce regulations that encourage refiners to use ethanol produced in Brazil or in California over the Midwestern version to meet targets for reducing greenhouse gas emissions. Midwest ethanol is considered to have a larger carbon footprint under the California rules, but the judge said the discrimination unconstitutionally interfered with interstate commerce.

California officials are appealing the decision. But no matter the outcome of that case, federal policy will still encourage Brazil to ship ethanol to the United States.

In 2012, the U.S. renewable fuel standard will require refiners to use 2 billion gallons of what are known as advanced biofuels, a category that excludes corn ethanol. Advanced biofuels are required to produce at least 50 percent lower greenhouse gas emissions than gasoline, and corn ethanol doesn’t qualify. Ethanol made from corn has a carbon footprint closer to gasoline because of energy needed to grow the grain.

Biodiesel, which is made from vegetable oil, animal fats and restaurant grease, will fill most of that advanced biofuel requirement. However, Brazil’s sugar cane ethanol counts as an advanced biofuel and could account for several hundred millions of gallons of the mandate, according to the EPA.

The advanced biofuel mandate is scheduled to continue growing after 2012, reaching 21 billion gallons by 2022.

Becker said he doubted Brazil would be able to sell much ethanol to the United States even with the advanced biofuel mandate in 2012. “They don’t have a bunch of additional export capacity,” he said.

But Brazil has welcomed both the end of the tariff and the advanced biofuel mandate.

The prospects for increased exports to the United States should promote investment in expanded sugarcane production and new distilleries in Brazil, said Marcos Jank, president of the Brazilian sugarcane industry association, known as UNICA. The end of the U.S. tariff also should encourage other markets, including the European Union and Japan, to drop similar trade barriers, Jank said.

The industry hopes to be exporting as much as 2 billion gallons of ethanol to the United States by the end of the decade, but Jank said it would take at least four years to expand enough to significantly increase Brazil’s U.S. sales.

“The elimination of the tariff doesn’t mean that exports will happen very shortly. In my opinion it’s a medium- and long-term process,” he said.

The Brazilian industry’s immediate problem is filling domestic demand. Brazil, which also mandates the use of ethanol, reduced the requirement from 25 percent to 20 percent amid the domestic supply shortage at the same time the country was continuing to export some of its biofuel to California and Florida.

“When they send us ethanol, it cuts their domestic supply, which increases the demand for corn ethanol to send down there,” said Bruce Babcock, an economist at Iowa State University. “Right now, if you went on straight market economics, we would be sending ethanol down to Brazil, not the other way around.”