Ethanol Exports: A Way to Scale the Blend Wall
The U.S. average ethanol-gasoline blend reached and at times slightly exceeded 10% in 2011. At this writing, industry sources indicate ethanol storage facilities are almost filled to capacity, gasoline use is below a year earlier, spot ethanol processing returns are negative, and a few plants have begun to reduce output. These developments may be at least partly a reflection of approaching market saturation. As we have indicated in previous articles, an E-10 national average blend represents the long-anticipated “bend wall” – the point where the nation’s fuel ethanol market becomes saturated or nearly so. (1)
In theory, E-15 and E-85 blends or blender pumps that let consumers to choose some other intermediate blend level could allow the fuel ethanol industry to move above the blend wall. However, gasoline retailers have been extremely slow to adopt E-15. That’s partly because of EPA’s failure to approve it for all model years of gasoline-powered vehicles. E-15 is approved only for 2001 and newer vehicles, thus creating liability concerns of retailers that it might be used in unapproved vehicles. Other concerns are related to vehicle warranties of newer vehicles. In some cases, costs of additional tanks and pumps and/or limited space for more tanks may also be limiting factors for gasoline retailers.
E-85 is approved only for flex-fuel vehicles. The flex-fuel vehicle fleet represents a very minor but growing percentage of the nation’s cars and light trucks, and will represent a larger potential market in the years ahead. However, the E-85 market size is limited by consumer choice. E-85 fuel mileage is about 24 to 28 percent lower than that from E-0 and varies slightly from one make and model to another. (2) There are two main requirements for this market to develop into a large one that will help the industry move well above the domestic blend wall and meet future increases in government ethanol blending mandates. First, E-85 needs to be priced at least 25% lower than gasoline at the retail level to make it attractive to consumers. Secondly, availability of E-85 blends at retail stations must be widespread across the nation or at least in a large geographic area. These conditions have not yet been met, although a time may come in the future when that is true. Loss of the blenders’ tax credit (VEETC) will make it more difficult for E-85 prices to be competitive with gasoline. (3)
Pricing E-85 at retail levels 25 to 28% lower than gasoline would widen the discount of corn to crude oil prices from what has been typical in the last three or four years. The potentially lower corn price (relative to crude oil) likely would be shared by corn growers, land-owners, and possibly through reduced profitability of ethanol plants. In the future, conversion of ethanol plants to production of “drop-in” fuels such as bio-butane may be another way for the biofuels industry to exceed the blend wall with less impact on corn prices. But for the time being, no easy way over the domestic blend wall is in sight.
In the current domestic blend-wall environment, the ethanol export market has become extremely important to the biofuels industry as a way to exceed the wall. In this article, we review recent U.S. ethanol export trends, factors affecting exports, prospects for the rest of the current marketing year and the longer-run future. We also examine the impact of ethanol exports on the demand for corn and corn market implications.
Recent Monthly Exports
Figure 1 shows monthly U.S. ethanol exports from December 2010 through November 2011. During this period, U.S. ethanol exports totaled 1.094 billion gallons. That would be equal to the ethanol produced from slightly over 400 million bushels of corn, or total production from four efficient-sized Midwestern ethanol biorefineries. Our usual price forecasting methods suggest that with other market conditions remaining constant, this additional amount of corn demand, after adjusting for DGS corn replacement, may add $0.25 to $0.30 to corn prices vs. price levels likely without it.
Monthly exports fluctuated substantially, varying by as much as 75 million gallons from one month to the next, making it difficult to identify a trend from the 2011 monthly data. November 2011 exports totaled 152 million gallons. While official EIA data are not available at this writing, trade sources indicate a further increase occurred in December 2011. Additional detail on export patterns is provided in the following section.
U.S. Ethanol Exports Reach New High in 2010-2012
The U.S. in 2010 became a net exporter of ethanol and in 2011 moved ahead of Brazil to become the world’s largest ethanol exporter. (4) Two dominant influences on U.S. ethanol exports are:
- Availability of Brazilian ethanol for Brazilian domestic use and exports,
- A 35% decline in the value of the U.S. dollar vs. the Brazil real from November 2008 through April 2011, and
- Foreign government ethanol blending mandates. These market influences worked together to push U.S. ethanol exports to a new high in the past year as shown in Figure 2.
- A fourth possible influence on ethanol exports is the price relationship of ethanol to gasoline. In mid-February, ethanol was priced much lower relative to gasoline than in recent years. Near-by ethanol futures on February 16 were $0.82 below near-by RBOB gasoline futures prices. A few months earlier, they were nearly equal to RBOB. The sharply lower price of ethanol relative to gasoline may be a modest stimulant to ethanol exports.
U.S. ethanol exports have increased considerably in the last five years. For the year ending November 30, 2011, un-denatured U.S. ethanol exports totaled 834 million gallons. (5) That was equivalent to about 6% of the nation’s ethanol production in the 2010-11 corn marketing year that ended on August 31.
In other words, slightly more than one out of every sixteen gallons of U.S. fuel ethanol production was shipped out of the country. When placed in this perspective, it is clear that ethanol exports have become economically significant not only to the ethanol industry, but also to corn growers, suppliers of inputs to the grain industry, and firms handling, conditioning, storing, transporting and marketing corn. Key questions for these and other related firms are as follows:
- To what destinations are U.S. ethanol exports being shipped?
- How politically stable are these destinations?
- Are significant foreign government policy changes ahead that may affect future foreign ethanol demand?
- Who are the major competitors in world ethanol markets?
- What are the prospects for future production and export availability of these competitors?
- Can we count on ethanol exports to provide a permanent and expanding market that will allow the industry to escape the U.S. domestic blend wall?
Ethanol exports become increasingly significant from a longer-run viewpoint when placed in a domestic “blend-wall” environment. In a world where the domestic ethanol demand appears to be very near the saturation point and government corn-starch ethanol mandates are only three years or 12% away from reaching their maximum, the recent growth in ethanol exports offers hope for continued expansion of the industry.
Ethanol Export Destinations
Figure 2 shows U.S. ethanol exports to the top five destinations in the year ending August 31, 2011 and the history of exports to these destinations since 1993-94. Canada has been the leading market for U.S. ethanol exports since the late 1990s and has increased substantially in size in the last few years. For 2010-11 as shown in Figure 2, U.S. exported 239 million gallons of un-denatured ethanol to Canada. About 88 million bushels of corn were required to produce that quantity of ethanol. (6) EU was the second-largest destination and was followed by Jamaica and Brazil. The “other” category represents a total of 98 million gallons of exports to 57 other countries, each of which purchases only a small amount of ethanol imported from the U.S. However, the other category has been a rapidly growing market, expanding from 3.8% of U.S. ethanol exports in 2007-08 to 13.6% in 2010-11. Exports to politically unstable countries (excluding UAR) totaled only 1.4 million gallons in 2010-11.
Exports to Canada
The importance of the Canadian market reflects its near-by location along with its biofuels mandates that require increased use of ethanol as well as biodiesel. Essentially all of its ethanol imports come from the U.S. (7) Canada’s main corn producing area is Ontario and its production is much smaller than in the U.S. Although it has ethanol production in western Canada that uses wheat as a feedstock, corn is more cost competitive and allows the U.S. to produce ethanol at very competitive prices. Preliminary data from FAS, a USDA report, indicate Canada’s ethanol production for 2011 was about 1.35 billion liters or about 357 million gallons. (8) At that level, Canada’s ethanol production in 2011 was equivalent to about 3.4% of its annual gasoline use. Canadian ethanol production capacity was estimated at 1.796 billion liters. That was a 12.5% increase from the previous year. Another 2% production increase is projected for 2012 when a 12.92 million gallon waste-to-ethanol plant is anticipated to be completed in Edmonton, Alberta. Another waste-to-ethanol plant also is being planned in Quebec that may be on line sometime in the next year or two.
Canada has a national ethanol blending mandate of E-5 that went into effect in December 2010. In addition, several provinces have ethanol blending mandates, as shown in Table 1. One-fourth of Canada’s gasoline consumption is in Alberta and British Columbia, both of which have E-5 mandates. An additional 20% is consumed in Quebec, which is implementing a 5% mandate this year. Based on these mandates, some further growth in U.S. ethanol exports to Canada is possible in the next few years. Growth could be tempered by increased Canadian production. Also, the varying provincial mandates create potential logistical issues in moving ethanol from producing to consuming provinces.
|Table 1. Canadian Provincial Ethanol Mandates|
* Increase from 3% to 5% by 2012
** In April 2011
*** Target by 2012
**** Possible target in co-operation with the federal government
Source - Canadian Renewable Fuels Association
With a 5% national mandate and gasoline sales for motor vehicles remaining at the 2009 level of 39.736 billion liters (9) or approximately 10.5 billion gallons, total federally mandated ethanol use in Canada would be approximately 525 million gallons. Because some provincial ethanol mandates exceed the federal level, the potential Canadian demand for fuel ethanol is somewhat larger. U.S. ethanol exports to Canada in the 2010-11 corn and ethanol marketing year were approximately 239 million gallons. (10) Combined domestic production and imports from the U.S. last season appear to have been about 600 million gallons. Additional growth in U.S. ethanol exports to Canada looks probable in the future, but the extent of the growth may be tempered by Canadian domestic production growth. Any changes in Canada’s biofuels policies and competitiveness of Brazilian ethanol exports also may affect future U.S. ethanol exports to its northern neighbor.
As with the U.S., Canada’s ethanol market probably will face a blend wall at some point, thus limiting the potential size of its market.
Exports to EU
The EU has been a minor market for U.S. ethanol for many years, but its imports increased sharply during the 2010-11 corn-ethanol marketing year to 227 million gallons. Its biofuels mandates are focused more on required reduction in greenhouse gas emissions (GHG) than on specific quantities of various fuels to be used. EU policies call for 10% of its motor fuels to be replaced by biofuels in 2020 Relevant biofuels include ethanol, biodiesel, electricity, hydrogen, etc. (11) Because many European vehicles are diesel-powered, biodiesel has received major emphasis, but ethanol-gasoline blends also are used to some extent. EU ethanol producers last year charged the U.S. with unfair ethanol export practices. (12) However, removal of the U.S. blenders’ tax credits for ethanol may negate the charges.
With current EU policies, significant expansion in EU imports of ethanol may occur in the next few years. Its U.S. imports will depend to a considerable extent on availability and price competitiveness of ethanol exports from Brazil.
United Arab Emirates and Mexico
UAR became a significant market for U.S. ethanol in 2010-11 for the first time. Stability of this market is uncertain. Mexico has been a small market for U.S. ethanol but increased its imports in 2010-11.
Brazil Ethanol Exports and Imports
As we have noted in previous articles, Brazilian exports have declined in the last few years in response to growing internal demand, disappointing domestic and global sugar production, and high sugar prices. These developments have caused it to shift from a net exporter of ethanol to the U.S. to an importer of U.S. ethanol. Brazil’s ethanol prices in late fall reached a 10-year high due to the tight internal supplies. Recent reports indicate Brazil’s ethanol exports may remain negligible through at least this year and possibly longer. On January 4, Biofuels Digest indicated Brazilian demand for ethanol is outpacing supply by about 25% (13) and production will continue to fall short of demand until at least 2013. In response to the tight supplies, Brazil has reduced its national ethanol blend from E-25 to E-20, has eliminated its 20% import tariff, and has increased its imports. Brazilian ethanol imports from April through December 2011 totaled 1.139 billion liters (300 million gallons), up from only 55.4 million a year-earlier. (14)
Commercial and USDA sources indicate Brazil’s sugar production (its main ethanol feedstock) has been lagging behind industry needs. Sugar cane is a perennial crop that typically is re-planted about every six years. A significant part of the crop is ready for re-planting, and new plantings need at least two years to reach maximum production potential. Recent high sugar prices should encourage increased plantings although competition with corn and soybeans for cropland might be a tempering factor. High ethanol prices also should begin to encourage increased investment in ethanol production facilities. However, government control of gasoline prices at artificially low levels reportedly is creating strong competition in retail fuel markets and is restraining Brazil’s domestic ethanol demand to some extent. (15) The exchange rate of the U.S. dollar against the Brazilian real also will be an important factor influencing U.S. exports.
Exports to Jamaica
Jamaica for a number of years has been an important ethanol producer and dehydrator, taking advantage of the Caribbean Initiative that allowed it to export ethanol to the U.S. duty-free. Sugar was its main feedstock for ethanol production, with supplies produced locally, in other Caribbean countries, and in Brazil. Recent very tight Brazilian sugar supplies and high prices created a price disadvantage for sugar-cane ethanol relative to corn-starch ethanol. As a result, two major Jamaican ethanol plants have closed in the past one and one-half years, idling 96 million gallons of annual production capacity. (16) Because of the lack of domestic production, Jamaica appears to be importing U.S. ethanol to meet local demand and previous obligations. The future of its U.S. ethanol imports depends heavily on Brazil’s sugar production, prices, and excess supplies for export to Jamaica. With increased world sugar production and lower prices, Jamaican ethanol imports might decline or it might return to a net export position.
Although U.S. ethanol exports are still a relatively small part of the total market demand, they have grown rapidly in the last three years and offer hope for an industry that appears to be very close to saturation of domestic demand. The major export markets for U.S. ethanol are politically stable and friendly Western Hemisphere countries. These nations, like the U.S., also have mandates to use biofuels in motor fuel supplies. Some further growth in U.S. ethanol exports looks likely this year. For the longer term, growth will depend heavily on competition from Brazil. The “other” category of U.S. ethanol export destinations also will be important to monitor. With the strong uptrend in gasoline prices currently being experienced and the large price discount of ethanol to gasoline, increased demand may be generated in these countries. Also, some countries in the “other” ethanol export market category are starting to place increased government policy emphasis on use of biofuels.
1 R. Wisner, “Biofuels prospects for 2012: Emerging developments”, Renewable Energy and Climate Change Newsletter, Ag Marketing Resource Center, January 2012: and R. Wisner, “Ethanol Blending Economics, the Expected "Blending Wall" and Government Mandates”, Renewable Energy and Climate Change Newsletter, Ag Marketing Resource Center, January 2009
2 EPA fuel economy web site
3 R. Wisner, January 2012, Op. Cit.
4 FAS, USDA, “U.S. on Track to become World’s Largest Ethanol Exporter in 2011”
5 Data source: EIA, U.S. Department of Energy, based on compilations of data from the Census Bureau
6 The corn volume is based on an un-denatured ethanol yield of 2.72 gallons per bushel of corn. Many analysts use a 2.78 gallons per bushel ethanol yield, which appears to reflect denatured ethanol.
7 FAS, USDA, Canada Biofuels Annual, July 5, 2011, GAIN Report No. CA 11036, p.15.
9 Ibid., p.10
10 EIA, Op. Cit.
11 Retka Schill “EU adopts 10 percent mandate”, Ethanol Producer Magazine, January 12, 2009
12 Cindy Zimmerman, “Europe Charges US with Unfair Ethanol Imports”, November 3rd, 2011
13 Brazil ethanol demand will top domestic supply through 2013 Biofuels Digest.com, January 4, 2012
14 Brazilian ethanol prices soar to 10-year highs as poor harvest take toll Biofuels Digest, January 9, 2012
15 Reuters, November 22, 2011, Inae Riveras, “BRAZIL CANE INDUSTRY CONFRONTS ITS OUTPUT LIMITS”, and Don Hofstrand, “Brazil Ethanol Industry”, Renewable Energy and Climate Change Newsletter, Ag Marketing Resource Center, April 2009
Additional reference: Renewable Fuels Association: THE PARADOX OF RISING U.S. ETHANOL EXPORTS: INCREASED MARKET OPPORTUNITIES AT THE EXPENSE OF ENHANCED NATIONAL ENERGY SECURITY?, May 19, 2010