U.S. Ethanol and DDGs Exports to NAFTA Partners
By S. Patricia Batres-Marquez
Decision Innovation Solutions, 11107 Aurora Avenue, Urbandale, IA 50322
The North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico, established in 1994, was aimed at reducing barriers to trade and investment among the three North American countries. Trade between the United States and these two countries has substantially increased since NAFTA implementation. In 2016, Canada was the second largest market for U.S. agricultural products with a value of $20.5 billion. The leading market destination in 2016 was China, with $21.4 billion worth of U.S. agricultural exports. In 2016, Mexico was the third largest value market for U.S. agricultural products. The 2016 value of U.S. agricultural exports to Mexico was up 0.8 percent to $17.9 billion from 2015.
U.S. Ethanol Exports
Figure 1. U.S. Total Ethanol Exports and Selected Destinations
Current U.S. ethanol exports to Mexico are small compared with those to Canada and Brazil. In 2016 the United States shipped 29 million gallons of ethanol to Mexico, which represented 2.8 percent of the 2016 total U.S. ethanol exports. 2016 U.S. ethanol exports to Mexico were down 14.2 percent from 2015.
Mexico’s Biofuels Law, published on February 1, 2008, was intended to promote ethanol production from different agricultural commodities. However, Mexico did not formally introduce ethanol into its commercial gasoline mix due to price fluctuations in both the oil and ethanol markets and the lack of an established supply chain (USDA-FAS, 2017a). In August 2016, Mexico’s Energy Regulatory Commission published new gasoline specifications in the Mexican Official Norm, NOM-016, allowing for the first time the use of up to 5.8 percent of ethanol as an oxygenate in gasoline, except in the metropolitan areas of Mexico City, Guadalajara, and Monterrey. The new NOM was implemented October 29, 2016. Mexico revised its fuel quality standards once again in June 2017. This time, the amount of acceptable ethanol in gasoline was increased from 5.8 percent to 10 percent in the country, except for the three metropolitan cities mentioned earlier. The new allowable ethanol blending sets Mexico’s fuel standards on par with the United States. While the new regulation intends to build a domestic biofuel industry in Mexico where both sugar cane and sorghum are grown, it also opens opportunities to expand U.S. ethanol exports to that country.
U.S. ethanol exports during the first four months of 2017 were up 39.6 percent to 481.8 million gallons compared with the same period last year. Canada continued as the second largest market for U.S. ethanol, with 19 percent of total exports (92.9 million gallons) and up 57.7 percent compared with January to April 2016. Canada is projected to import 264.2 million gallons of ethanol in 2017, nearly 100 percent originating from the United States (USDA-FAS, 2016). Brazil is the top market for U.S. ethanol so far this year (January to April 2017), with 39.6 percent (190.89 million gallons) of total U.S. ethanol exports.
U.S. DDGs Exports
Despite variability, U.S. exports of distillers dried grains (DDGs) has increased significantly since the 2007/08 marketing year (see Figure 2). From 2009/10 to 2015/16, except for 2010/11, China was the top market for U.S. DDGs, and as Figure 2 shows, exports to China increased during this period, but followed a volatile trend. China’s antidumping and countervailing duty against DDGs coming from the United States reduced DDGs exports to that country in the 2015/16 marketing year. 2015/16 exports to China were down 37.7 percent to 3.342 million metric tons (MT) year over year.
Meanwhile, exports to Mexico have been growing since 2012/13 and from 2011/12 to 2015/16 Mexico was the second largest market for U.S. DDGs. The United States is the only source of DDGs to Mexico (USDA-FAS, 2017b). DDGs is used as a substitute for oilseed meal (mainly soybean meal) in feed concentrate formulas. Competitive DDGs prices over soybean meal prices is a factor that contributes to the strength of U.S DDGs exports to Mexico. In 2015/16, exports to that country were up 19.4 percent to record high 1.901 million MT compared with the previous marketing year (see Figure 2).
Figure 2. U.S. Total DDGs Exports and Selected Destinations
With exports to China dropping 70.2 percent (1.655 million MT) to 0.704 million MT during the first three quarters of the 2016/17 marketing year, Mexico has become the number one destination for U.S. DDGs with 18.0 percent of total volume of U.S. DDGs exports. Exports to Mexico increased 8.1 percent to 1.513 million MT compared with the first nine months of the 2015/16 marketing year. In addition to Mexico, U.S. DDGs exports to other important markets has grown during the first three quarters of the current marketing year. Exports to Turkey (1.008 million MT), South Korea (0.723 million MT), the European Union (0.723 million MT), Thailand (0.603 million MT), Canada (0.480 million MT), Indonesia (0.349 million MT), Japan (0.298 million MT), and other destinations (1.513 million MT) all have experienced growth. The increase in exports to Mexico plus these other eight markets have counterbalanced the decline in exports to China and Vietnam, which is another market experiencing lower U.S. DDGs imports so far (Sept 2016 to May 2017) this marketing year. China and Vietnam markets were the fifth and seventh largest markets for U.S. DDGs exports, respectively. The total volume of U.S. DDGs exports from September 2016 to May 2017 (8.433 million MT) was about the same as September 2015 to May 2016 (8.418 million MT).
U.S. DDGs exports to Mexico during the first three quarters of the 2016/17 marketing year were valued at $261.499 million and represented 18 percent of the total value of U.S. DDGs exports ($1.456 billion) during that period.
The United States free trade agreement with Canada and Mexico is on the verge of a renovation. On May 18, 2017, notice regarding the modernization of NAFTA was provided to Congress by the U.S. Trade Representative Office (USTR) to fulfill the 90-day notice before initiating negotiations with any country (USTR, 2017). Public comments to help inform the direction and content of the NAFTA negotiations were closed on June 12, 2017. A public hearing was held on June 27, 2017. The earliest date a detailed summary of the negotiation objectives and expected positive U.S. outcomes will be published on the USTR website is July 17, 2017. The earliest date negotiations with Canada and Mexico can begin is August 16, 2017.
As the second largest destination for U.S. ethanol exports, Canada is a key market that greatly contributes to the strength of U.S. ethanol trade. Canada is the eighth largest market for U.S. DDGs exports. Currently, Mexico is the top market for U.S. DDGs exports. In addition, Mexico’s new allowable ethanol blending into gasoline of 10 percent provides opportunities for expanding U.S. ethanol exports to that market. Renegotiation of NAFTA is intended to improve U.S. trade opportunities with Canada and Mexico. Because the resulting trade policy with these two countries is uncertain at this point, it is unclear what the impact on U.S. exports of ethanol and DDGs to Canada and Mexico would be. If any case, U.S. ethanol and DDGs exporters don’t need tariff and non-tariff barriers imposed by Canada and Mexico due to renewed NAFTA negotiations.
Errata: Due to a recent revision by the Iowa Department of Revenue to the 2015 and 2016 data published in the Retailers Motor Fuel Gallons Annual Report, Figure 4 of our May 2017 article “Overview of Iowa Biofuel Tax Credits and Ethanol Blends Sales: E10, E15, E20, and E85” has been corrected.
USDA-FAS (Foreign Agricultural Service), 2016. Canada Biofuels Annual 2016. Global Agricultural Information Network (GAIN) Report Number: CA16038. August.