Brazilian Ethanol Exports
AgMRC Renewable Energy Newsletter
Co-director, Ag Marketing Resource Center
Iowa State University Extension
(Last in a Series)
In the previous two articles in this series we discussed Brazil’s burgeoning sugarcane ethanol industry and the expanding use of ethanol in Brazil’s transportation sector. In this article we will discuss Brazil’s potential and limitations in exporting ethanol to other countries, including the U.S.
Brazil is the world’s largest exporter of ethanol. In 2006, Brazil accounted for 52 percent of the world’s ethanol exports. It exports about one billion gallons of ethanol annually as shown in Table 1. This is about 20 percent of Brazil’s ethanol production. The U.S. is the largest importer of Brazilian ethanol. European, Caribbean and Central American countries account for most of the remaining imports.
Countries like Sweden and Japan are looking to increase ethanol imports due to concerns about global warming. Both of these countries are taking steps to greatly increase the number of flex fuel vehicles. By the end of 2009, Sweden is expected to have E85 pumps in 60 percent of its filling stations. This year a trial program will be started in Stockholm with a fleet of buses that use ethanol-powered internal combustion engines and electric motors.
Japanese companies are investing close to $500 million in Brazilian ethanol production. The first facilities will be built in Goias State. All of the ethanol is expected to eventually be sent to Japan. However, Japan needs to first expand its capacity to blend ethanol in gasoline. Also, a feasibility study is under consideration for the construction of a pipeline to carry ethanol from Brazil's south central interior states to the Brazilian coast.
Table 1. Brazilian Ethanol Exports by Country of Destination
(2006/07 marketing year)
|Country||Million Gallons||Percent of Total|
Source: GAIN Report: BR8013, USDA Foreign Ag Service
Exports have increased substantially from about 200 million gallons in 2003 to one billion gallons in 2007, as shown in Table 2. This is almost a 500 percent increase. The great majority of Brazil’s exports are in the form of “hydrous” ethanol. Hydrous ethanol contains about 95% ethanol and 5% water while anhydrous ethanol is without water. When blended at low levels with gasoline, hydrous ethanol needs to be dehydrated, resulting in anhydrous ethanol. However, the dehydration process is costly and energy-consuming. So much of the dehydration occurs after the ethanol leaves Brazil.
Table 2. Brazilian Ethanol Exports (hydrous, anhydrous) (million gallons)
Source: GAIN Report: BR8013, USDA Foreign Ag Service
For example, Trinidad has plans to expand it ethanol dehydration capacity by building a new 100 million gallon facility. Brazil’s hydrous ethanol is shipped to Trinidad where the water is removed. The anhydrous ethanol is then shipped to the United States. Trinidad is a Caribbean Basin Initiative (CBI) country, and, as discussed below, the ethanol may be exempt from U.S. import tariffs.
|Costa Pinto Production Plant located in Piracicaba, São Paulo state.
This industrial plant is set up to produce sugar, ethanol fuel (both anhydrous and hydrous), industrial grade ethanol, and alcohol for beverages.
The foreground shows the receiving operation of the sugarcane harvest, immediately followed by the mill process, and in the right side of the background is located the distillation facility where ethanol is produced. This plant produces the electricity it needs from bagasse residuals from sugar cane left over by the milling process, and it sells the surplus electricity to public utilities.
U.S. Ethanol Imports
Brazil is the major source of U.S. imports of ethanol as shown in Table 3. In 2007, over 40 percent of U.S. imports came directly from Brazil. Most of the remaining imports came from Central American and Caribbean Island countries. Traditionally the two largest have been Jamaica and El Salvador.
Table 3. U.S. Ethanol Imports by Country of Origin (million gallons)
|Trinidad and Tobago||0||9||27||49|
|Percent from Brazil||58%||25%||62%||42%|
|Imports as percent of production||4%||3%||15%||7%|
Source: Energy Information Administration
U.S. Ethanol Import Tariffs
Ethanol consumed in the United States receives a subsidy of 51 cents per gallon. The subsidy (Volumetric Ethanol Excise Tax Credit) is provided to the blender of the ethanol with gasoline. For example, a ten percent blend of ethanol (10% ethanol and 90% gasoline) receives a subsidy of 51 cents per gallon of ethanol or 5.1 cents per gallon of blended fuel.
The subsidy was implemented to help the fledgling U.S. ethanol industry develop. However, the subsidy is available for all blended ethanol regardless of whether the ethanol is domestically produced or imported. To offset the subsidy for imported ethanol so U.S. taxpayers are not subsidizing foreign ethanol production, an import duty was imposed. The import duty is 54 cents per gallon, slightly larger than the current subsidy of 51 cents. So, the “actual” import duty is 3 cents (54 cents less 51 cents = 3 cents). When the subsidy is reduced to 45 cents the actual import duty will be 9 cents. The tariff on ethanol imports is scheduled to expire in 2010, unless extended.
The import tariff is imposed on all countries except the Caribbean Basin Initiative (CBI) countries. The CBI consists of nineteen qualifying countries in the Caribbean and Central America. These countries can export ethanol to the U.S. duty free. To export to the U.S. under this rule, the ethanol must be produced from the country’s domestic feedstocks. In other words, they cannot import Brazilian sugar, convert it into ethanol, and sell it duty free to the U.S.
However, there is another twist to the rules. A CBI country can import the feedstock, process it into ethanol, and sell it into the U.S. duty free if the total amount sold by all of the CBI countries to the U.S. does not exceed an amount equal to seven percent of the U.S. annual ethanol consumption. For example, in 2006 the U.S. consumed 4.86 billion gallons. So the seven percent limit was 340 million gallons. This is advantageous for CBI countries like Jamaica and Trinidad.
Policy decisions by the new U.S. administration and congress could have significant repercussions for Brazil and the CBI countries. The CBI comes up for renewable in 2010. A movement to further protect the U.S. ethanol industry by not renewing the CBI would be detrimental to both the CBI countries and Brazil. Conversely, a movement to open up ethanol trade by removing the 54 cent import tariff would be advantageous to Brazil at the expense of the CBI countries.
Why doesn’t the U.S. import Brazilian sugar and process it into ethanol domestically? Brazil would get the benefit of a market for the sugar feedstock that is sold into the U.S market duty free. However, the U.S. has long had import quotas on foreign sugar. The quotas were designed to protect the U.S. sugar beet industry from competition by lower-cost foreign sugar cane. These quotas keep U.S. sugar prices substantially above world sugar prices.
In addition to the 54 cent import duty, an “ad valorem” tax is also placed on ethanol imports. The tax is equal to 2.5 percent of the value of the imported ethanol. For example, $2.00 ethanol would be taxed 5 cents per gallon ($2.00 X .025 = 5 cents). Adding the 5 cent tax to the 54 cent duty will result in a total cost of 59 cents per gallon of $2.00 ethanol.
Exchange Rate Impact
Other factors, in addition to the import duties, impact the profitability of exporting Brazilian ethanol to the U.S. One of these is the exchange rate between the U.S. dollar and the Brazilian real. The monthly exchange rate between the dollar and the real is shown in Figure 1. The number of Brazilian reals that a U.S. dollar will purchase has dropped steadily since 2003, until reversing slightly during the last few months. In early 2003, the dollar purchased 3.5 reals. By the summer of 2008, the dollar purchased slightly over 1.5 reals. This has been a result of the weakening dollar and the strengthening real.
The impact of this long-term exchange rate trend can be seen in Figure 2. While the price trend of Iowa ethanol has doubled from slightly over $1.00 per gallon at the beginning of 2003 to over $2.00 in 2008, the price of Iowa ethanol in Brazilian reals has remained flat during this period. .
However, in recent months there has been an exchange rate reversal. The combined strengthening of the dollar and weakening of the real has improved the situation for Brazilian exports. The strengthening dollars has increased the price of Iowa ethanol in Brazilian reals while the actual price in U.S. dollars has declined (Figure 2). If this recent trend continues, it will further increase the price of Brazilian ethanol exported to the U.S. So, more Brazilian ethanol could flow into the U.S. However, this would compete with Brazil’s expanding domestic demand and its export demand from Sweden, Japan and other importing countries.
A further perspective on the impact of the exchange rate is shown in Figure 3. As shown in Figure 2, the price of Iowa ethanol has fluctuated around $2.00 per gallon from the fall of 2005 to the present time. So, if we assume a constant ethanol price of $2.00 per gallon, the price of ethanol in Brazilian reals has dropped from seven reals per gallon in 2003 to slightly over three reals per gallon in 2008, with an uptick in the last couple of months. Figure 3 also shows the Brazilian price when the 54 cent duty is included and also when both the 54 cent duty and the ad valorem tax are included. If we include these duties on Brazilian ethanol exports to the U.S., the net Brazilian price declines from five reals per gallon in 2003 to slightly over two reals in 2008, with an uptick in the last couple of months.
The economic downturn appears to have hit Brazil’s booming economy. Job losses are causing unemployment rates to rise. Ethanol is one of the bright spots in Brazil’s economy, although it has been recently impacted also. Over one billion dollars has been assembled from investors across the world to invest into Brazil’s biofuels sector. The investments will focus mainly on ethanol and electricity production.
Two U.S. agribusiness giants have recently developed business relationships with Brazilian sugar producers. Monsanto purchased Aly Participacoes, a Brazilian company, to take advantage of the rising global demand for sugar and biofuels. With the purchase, Monsanto will have access to the world’s largest private sugarcane breeding company and an applied genomics company focused on biotech traits for sugarcane.
ADM has recently formed a joint venture with Grupo Cabrera to construct two sugarcane ethanol complexes in Brazil. Each complex will consist of a sugarcane plantation, sugar mill, ethanol distillery and a biomass-powered cogeneration facility to provide power and steam. Each facility will have the capacity to crush three million metric tons per year.
Copersucar, a Brazilian sugar and ethanol producing cooperative giant, has converted to a company and plans to increase production by 200 percent over the next ten years. The cooperative was composed of 33 sugar and ethanol mills.
Petrobras, Brazil’s state owned oil giant, plans to build 20 ethanol plants. Some of these will be built jointly with a Japanese trading company. Petrobras has also recently signed an agreement with the U.S. DOE’s National Renewable Energy Laboratory (NREL) to research the development and commercialization of second-generation biofuels.
However, expanding Brazil’s ethanol industry will require a substantial investment in infrastructure to reduced transportation costs from the mills to the consumer centers and ports. There is also a considerable time lag in ramping up ethanol production. Planting sugarcane and constructing new sugar/ethanol mills requires a startup of about 3-5 years.
Ethanol Demand Driving the Expansion of Brazil’s Sugar Industry, Sugar and Sweeteners Outlook/SSS-249/June 4, 2007, Economic Research Service, USDA
GAIN Report Number: BR7011, USDA Foreign Ag. Service, 2007
GAIN Report Number: BR8013, USDA Foreign Ag. Service, 2008
Corn-Based Ethanol in Illinois and the U.S.: A Report from the Department of Agricultural and Consumer Economics, University of Illinois, November 2007,
Green Car Congress
ADM Forms Joint Venture with Grupo Cabrera to Construct Two Sugarcane Ethanol Processing Complexes, Grainnet , Nov. 4, 2008
Monsanto to Buy Aly Participacoes for $290 million, Triangle Business Journal, Nov. 3, 2008
Office of the U.S. Trade Representative
Energy Information Administration
Biofuels Roundup: Brazilian Ethanol Gets Japanese Boost, Greentech Media, Sept. 30, 2008
McCain, Obama’s policies likely to hurt Jamaica’s ethanol exports, The Jamaica Observer, Nov. 2, 2008
Biofuel in Sweden, Wikipedia
Brazilian biofuels get $1bn vote of confidence, Businessgreen.com
Brazil’s sugar co-op giant, Copersucar, converts to company; Brazil’s largest producer now aims for 200 percent growth, Biofuels Digest, October 2008