Brazil Ethanol Developments & Implications for the U.S. Ethanol Industry
AgMRC Renewable Energy & Climate Change Newsletter
Dr. Robert Wisner
University Professor Emeritus
Iowa State University and
For many years, Brazil was the world’s largest producer of fuel ethanol. The U.S. is now the No.1 ethanol producer but Brazil’s ethanol policies, production, and exports are an important influence on the U.S. biofuels industry. Through government incentives, Brazil’s ethanol industry became a major source of bio-based motor fuel in the 1990s and in recent years has been a major ethanol exporter. Brazilian ethanol is produced from sugar cane, a low-cost feedstock that also allows processors to use the cane stalks as fuel for processing plants after the juice has been removed for ethanol or cane sugar production. Sugar cane is a perennial crop that needs to be replanted only every 6 to 8 years. The sugar marketing year in Brazil’s major center-south sugar producing region runs from May through April, although crushing of sugar cane has sometimes started as early as late March. In the northeastern Brazil sugar area, the marketing year runs from September through August. Brazil sources indicate 90% of the crop is produced in the center-south region.
With large ethanol production, Brazil’s government has been able to mandate ethanol-gasoline average blends of 18% to 25%. The percentage blend can vary from time to time, depending on the available supply of ethanol. 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. (1) In recent years before June 2012, Brazil had a federal tax on gasoline but not on ethanol, thus helping to provide an economic advantage for ethanol. In June 2012, the gasoline tax was removed, thus tending to reduce the advantage of ethanol relative to gasoline. Individual states continue to tax gasoline at varying levels. (2)
The number of flex-fuel vehicles in Brazil’s automobile fleet has increased rapidly in the last few years and now accounts for most new car sales. As a result, 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.
This year, the U.S. faces a drought-reduced corn crop and tight U.S. domestic ethanol feedstock supplies. U.S. ethanol production is projected to decline from last season. The impact of reduced domestic production on supplies and cost of ethanol for U.S. motorists, profitability of domestic ethanol processors, corn use for ethanol, and corn and distillers grain and solubles (DGS) prices will be influenced partly by potential imports from Brazil and the amount of competition U.S. ethanol exports face from Brazilian ethanol.
Factors Affecting the Economics of Brazilian Ethanol Production
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. Brazil is the world’s largest sugar producer. The size of its crop and that of India (the No. 2 sugar producer) have a major impact on world refined sugar cane prices. Those prices influence Brazil’s sugar processors in determining how much of its production should be refined as sugar vs. processed into ethanol. In the last two years, sugar cane crops in Brazil and India have been disappointing because of less than ideal weather. World sugar prices have been high, signaling to Brazilian processors to increase the percentage of the crop devoted to sugar production rather than ethanol. This tendency has been reinforced by at least two other developments. Brazil’s governmental petroleum company, Petrobras, has kept gasoline prices artificially low during the last few years to help restrain inflation. Low domestic prices for gasoline have kept domestic ethanol prices low, thus discouraging increased use of sugar cane for ethanol. That tendency has been reinforced by removal of the federal gasoline tax. Also, attractive returns for corn and soybeans have encouraged farmers to place greater emphasis on those crops. As a result, part of Brazil’s sugar cane crop is becoming aged and in need of replanting. After reaching peak production, productivity of sugar cane plants tends to decline in the last few years before replanting. Early indications are that Brazil’s early 2012 sugar crop was near or slightly below last season. However, availability of sugar for ethanol production in the 2012-13 U.S. corn marketing year is still uncertain and will depend strongly on the size of Brazil’s spring 2013 sugar crop.
Trends in Brazil Biofuels Use
Figure 1 shows the trend in Brazil’s use of gasoline and ethanol since 2006 and August 2012 projections for 2013 use. (3) Its gasoline use has trended sharply upward while ethanol use declined moderately starting in 2010 but increased slightly in the last two years. Brazil’s consumption of ethanol as a motor fuel reached almost 90% of the volume of gasoline in 2009 but since has declined to about 55% because of strong international demand for sugar and limited domestic production. Brazil’s limited sugar cane production was partly due to adverse weather and also as a result of an aging sugar cane crop.
Brazil Adjustments to Tightening Ethanol Supplies: U.S. Implications
This combination of developments has led to a decline in Brazilian ethanol exports (Figure 1) in the last few years. In adjusting to declining export availability and tightening domestic ethanol supplies, Brazil’s government took two actions to deal with the situation. As we noted above, it reduced the mandated level of ethanol blending with gasoline from 25% to 20%. Secondly, it eliminated its tariff on ethanol imports. In December 2011, Brazil extended its zero tariff on imports of ethanol with less than one percent water to December 31, 2015. (4)
With these policy changes, the U.S. ethanol industry last year and earlier this year faced not only reduced export competition from Brazil, but also was able to export a modest quantity of ethanol to Brazil. Figure 2 shows Brazilian ethanol exports and imports for the last few years and August projections for 2013. The chart shows a downward trend in Brazil’s ethanol exports and an upward trend in its imports. Early and very tentative projections for 2013 show a marginal increase in Brazil’s ethanol exports and a significant increase in its imports. We caution that these projections should be viewed as very tentative since Brazil’s major sugar cane harvest season is still at least six months away.
Key Questions for the U.S. Ethanol, Feed, and Livestock Industries
One key question for the U.S. ethanol, grain, feed, and livestock industries is “What will Brazil’s ethanol supply-demand balance be in the year ahead?” The answer to this question will influence (1) the amount of sugar cane ethanol imported into the U.S., and (2) the size of U.S. ethanol exports. Consequently, it will have a bearing on the amount of U.S. corn processed for ethanol and the amount remaining for other uses.
U.S. Monthly Ethanol Imports and Exports
In the 2010-11 corn marketing year, the U.S. imported approximately 171 million gallons (646.6 mil. liters) of ethanol and exported approximately 838 million gallons (3.173 billion liters) of ethanol as shown in Figure 3 below. (5) Its exports went to a wide range of destinations, as shown in Figure 4. (6) The leading destinations in 2010-11 were Canada, EU, Brazil, United Arab Emirates, and Mexico in that order. Before Brazil removed its ethanol import tax in the 2010-11 marketing year, U.S. ethanol exports to Brazil were almost insignificant.
Figure 5 shows monthly U.S. ethanol exports through June 2012. There is a considerable lag time in EPA’s release of monthly U.S. ethanol export and import data. Reports from January through June 2012 indicate U.S. ethanol exports were running at an annual rate of approximately 960 million gallons while imports were running at a 182 million gallon annual rate. The six-month annual average ethanol exports rate in corn equivalent would be about 345 million bushels. Monthly exports have fluctuated in a relatively narrow range since January. Trade sources indicate a large part of the decline in ethanol exports after the first of the year reflected EU’s new restrictive policy on imports of U.S. ethanol.
First-half 2012 monthly ethanol imports (Figure 6), at an annual rate, in corn equivalent would be approximately 65 million bushels. However, June ethanol imports increased sharply. June imports converted to an annual rate would be about 402 million gallons, or the equivalent of ethanol from about 145 million bushels of corn. June exports were at an annual equivalent rate of approximately 910 million gallons, with a corn-equivalent of about 325 million bushels.
Recent trade reports suggest U.S. ethanol exports may decline modestly in coming months because of the increase in ethanol prices. There also is an expectation that imports may increase.
With the time lag in releasing EPA’s monthly trade data, another month or two and perhaps longer will be needed before impacts of higher ethanol prices than a year ago will begin to show up in monthly import and export reports.
California Air Quality Regulations
California’s Air Quality Board (CARB) has established very strict Greenhouse Gas (GHG) emissions standards and these may be an influence on U.S. ethanol imports. The standards restrict imports of Midwest corn-starch ethanol into the state and favor imports of Brazilian sugar cane ethanol. (7) A lower court has affirmed the acceptability of these regulations. However, they may be tested again in a higher court. The regulations encourage imports of Brazilian and Caribbean-Basin sugar cane ethanol into California to reduce GHGs. Sugar cane ethanol imports are considered an advanced biofuel and help to meet the U.S. advanced biofuels mandate. Biodiesel is the only U.S.-produced advanced biofuels available in significant commercial quantities. Imports of Brazilian and Caribbean-Basin ethanol thus do not do not compete with corn-starch ethanol in meeting the conventional ethanol mandates. However, they do reduce the amount of the blend-wall restricted ethanol market that is available for corn starch ethanol.
Brazil’s exports of ethanol to California may tighten Brazilian ethanol supplies and may create an opportunity to export U.S. corn starch ethanol to Brazil. Thus, California’s policies have the potential to create uneconomical trade patterns and may not reduce global GHG emissions as much planned.
Net U.S. ethanol trade in 2010-11 and the first half of 2011-12 have been strongly positive. A late August USDA report on Brazil’s ethanol industry indicates production is likely to be restrained at least until March or early April 2013, when the next sugar cane crop becomes available to processors. (8) Recent Brazilian ethanol production has been below a year earlier, along with its exports. Because of limited ethanol production, Brazil indicates it will keep mandated ethanol-gasoline blends at 20%, rather than the previous 25% for at least the next several months. This information appears to signal that Brazil will have limited ethanol exports, at least until better estimates of its next sugar cane crop become available. This information reinforces a view that Brazil will not offer a strong increase in export competition for U.S ethanol in the next 5 or 6 months, but its competition may increase from March or April onward if weather in its south central sugar belt is favorable. For the current U.S. corn marketing year, higher ethanol prices and possible increased Brazilian ethanol competition in the last half of the season may modestly reduce net U.S. ethanol exports and increase its imports.
Brazil’s availability of sugar for ethanol production will also be affected by the size of the sugar crop in other important sugar producing or exporting countries. Especially important areas are India (the world’s second-largest sugar producer), Australia and Thailand (important exporters), and EU. USDA’s Foreign Agriculture Service will have an updated world sugar markets and trade report in November that will have new estimates of current production and exports in these and other countries.
1 Sergio Barros, Brazil Biofuels Annual Report, , Foreign Agriculture Service, Global Agricultural Information Network (GAIN),U.S. Department of Agriculture, Brazil Biofuels Annual Report, 2012-13, August 21, 2012, GAIN Report Number 2012013
2 Ibid. This report provides additional detail on Brazil’s tax policies and other subsidies for ethanol.
3 Source of data for Figure 1 is Ibid.
5 ERS, USDA, Feed Yearbook Data Base, Tables 32 and 33.
7 R. Wisner, “Biofuels and Greenhouse Gasses on a Collision Course”, Renewable Energy and Climate Change Newsletter, Ag Marketing Resource Center, June 2009.
8 Foreign Agriculture Service, op.cit.