Monday, April 04, 2011
The World Market For Ethanol You Did Not Know About.
While the consumer market digests the potential shortage of corn and soybeans over the next 18 months, ethanol will undoubtedly get some blame for taking corn away from other markets. But ethanol is going through an interesting metamorphosis of its own that could provide a considerable amount of octane to its ability to buy corn at higher price levels.
Livestock producers can only afford to pay so much for corn before profits disappear and consumers refuse to buy meat at prices that would provide profitability. Importing nations, such as China, can afford to buy corn whenever needed because of the exchange rate that makes it a lesser expensive feed when purchased with US dollars. However, ethanol producers who have a pipeline into the export market may find added demand from a variety of nations that need to buy it. At a time when ethanol imports are controversial along with the import tariff to protect domestically refined ethanol, it has built a considerable foreign demand.
Iowa State University economist Bob Wisner’s March newsletter outlines a market for ethanol that may not be well known. The availability of an export market certainly removes the pressure applied by the “blending wall” which limited ethanol to 10% and 15% of the domestic motor fuel supply. The 10% limit was reached in 2010 as refiners were producing 14 billion gallons to meet the 10% limit of the 140 billion gallon motor fuel market in the US. The EPA has been opening up the limit to newer vehicles in a stair step schedule.
However, refiners have an export outlet if they are producing more ethanol than the domestic market can consume, and surprisingly, over the years Brazil has been a significant market despite the fact Brazil has wanted to export ethanol into the US. That ironic situation seems to be quite dependent upon the price of sugar, which increases the complexity of the issue according to Wisner.
For the past 12 years ethanol exports have been widely variable. In the past 10 years exports floated around the 50 million gallon mark, but reached above 250 million gallons in 2009/2010. As far back as 1990 and again in the mid- 90’s ethanol exports were around the 150 million gallon level. The trend may be up, but volatility is a dominant factor in the trend line. Wisner says as many as 90 countries have purchased US ethanol in the past 21 years, varying from a few thousand gallons to millions. Most of the purchases have gone to Brazil, Canada, Mexico, and the European Union. In the past year, exports were 2% of US production, or the output of nearly 3 Midwestern biofuel refineries.
Wisner says Brazilian purchases go up when the sugar market goes up. Sugar is a major crop in Brazil, and if sugar prices are high, Brazil will sell sugar to the world market, and will not have enough sugar to refine into ethanol. When sugar prices are low, sugar is converted to ethanol and it does not need to import any from the US. With half of the motor fuel in Brazil relying on ethanol, a steady supply needs to be available. He says, “For the longer term, Brazil has plans to continue expanding its sugar production and ethanol output. It has developed infrastructure for exporting ethanol, including an export terminal at the port of Santos and a pipeline for transporting ethanol to that area. Barring continued world sugar production problems, Brazil probably should not be viewed as a stable long-term market for U.S. ethanol.”
So where would US ethanol be exported? Wisner says Canada would be a more dependable market, since it also has biofuel mandates and US ethanol plants are not far away. However, that may be a problem for the Mexican market, since transportation costs would be increased. Wisner says Brazilian ships may provide lower cost ethanol than American rail or truck carriers. He says other markets may slowly increase as governments attempt to supply alternative fuels and find alternates to the political uncertainties in Middle Eastern nations.
Summary:
While currently not a large market for ethanol, exports represent a potential relief valve for the biofuel refining industry as it approaches the blending wall limit for US motor fuel. It also provides a source of alternative fuels for some nations looking for alternatives and to manage their risk against the political uncertainties of Middle Eastern oil producers.
Posted by Stu Ellis on 04/04 at 12:00 AM | Permalink
Comments
Posted by: Terry Burke at April 4, 2011 8:08AM
I thought the main reason for US taxpayer subsidies to the ethanol industry was to reduce our dependence on foreign oil. If that’s the case, then why are we exporting ethanol at all? It’s time to drop subsidies for Ethanol.