Cheaper Ethanol from Brazil Could Cripple U.S. Producers

Rumor has it that Brazil's ethanol producers are getting ready to invade the U.S. market. Many will be willing to swallow the 54-cent tariff (which is expected to expire in 2009) imposed on their ethanol. Joao Val, CFO of Sao Martinho SA, one of Brazil's leading ethanol producers, believes "Brazil is going to be much more aggressive this summer to sell ethanol...in the U.S."

With U.S. corn ethanol currently selling at a high price of $2.48 per gallon, many Brazilian companies see a lucrative opportunity in exporting their cheap sugar-cane based alternative. Even with the tariff included, Americans currently get to purchase Brazilian ethanol at a bargain price of around $2.18 a gallon. This number is bound to go even lower with Brazil harvesting a record-breaking sugarcane crop of over 500 million metric tons.

This only spells trouble for the U.S.'s nascent ethanol industry, as U.S. producers are already struggling with high corn prices. Currently hovering around $6 a bushel, corn prices are expected to go even higher as the USDA recently announced an 8% expected drop in U.S. corn plantings.

As a result, several ethanol producers have already suspended production or even filed for bankruptcy, such as Kansas based Ethanex Energy. New Zealand's LanzaFuels announced late last year its plans to put local ethanol production on hold due to cheaper imports from Brazil. Brazil's cheap prices will only make it harder for these companies to grow.

Brazil will be especially eager to sell to the U.S. with recent developments in the European market. Brazil's hold on this market has become increasingly tenuous as Germany has decided to postpone its plans to introduce a mandatory 10% ethanol mix in gasoline and the UK has decided to do away with the credit line for its E85 program. With more focus put on the U.S. market, Brazil may be successfully maneuvering a checkmate to an already beaten down U.S. ethanol industry.

Comments

[haydete:]

Let's see... we get to eat our food and have lower prices at the pump, while farmers have planted less corn and are growing something that is more profitable anyway. The only thing wrong is in the minds of those that thought corn was the dominant long term feedstock for ethanol, which was an economic and technical misjudgement.

2008 Apr 15 07:56 AM

[Halp:]

Watch out OPEC !
It seems that you have awakened a sleeping giant!
This time that giant resides in the America's and "guarantees a free press". This (federal) republic "has a vigorous media that thrives on open debate regarding political and social matters".
They ..Brazil that is....also had the foresight to shed their dependence on your products and may now get their due.
As for the implications for our ethanol industry? Perhaps haydete (April 15, 7:56AM) was correct.. going all corn was a misjudement. We do learn from our mistakes.

2008 Apr 15 09:36 AM

[ladders11:]

The next administration needs to get serious and drop the tariff on this imported sugar cane. I don't want to depend on middle eastern oil. The reigh of Bush incompetence ends soon.

2008 Apr 15 10:38 AM

[Tim Plaehn:]

So you want to be dependent on the Brazilian sugar crop? If Brazilian ethanol is allowed in this country there will never be a viable cellulosic ethanol program in the U.S. Is that what you really want? We need U.S. based energy sources, not trade one foreign source for another.

2008 Apr 15 11:59 AM

[Scott Benson:]

I think this isn't adding up. The U.S. produced 7 billion gallons of ethanol in 2007, and Brazil only produces 4.5 billion gallons of ethanol per year, even with their "record sugarcane crop." Add them together and you still don't have any real displacement of vehicle fuels (210 million gallons of gasoline and diesel per year in the U.S.) They can ship all they want but it isn't going to matter.

2008 Apr 15 12:55 PM

[ValueInvestor:]

Tim P,

You don't get it. The US NEEDS foreign energy sources because the US doens't have the means to produce enough energy domestically to become energy independent. You went from an energy exporter to importer in the 70's and now import over 12 million gallons of oil a DAY. Whatever the US does it will always be a net importer and be dependent on foreign energy no matter what.

Given that, why wouldn't you want to get your ethanol cheaper? Who cares where it comes from? Its cheaper. These US isolationist policies that the gov't is pitching is only going to hurt the US in the long run.

2008 Apr 15 03:23 PM

[elliot_mllr:]

Value Investor overlooks the wrath of the US corn farmers in Iowa (the early primary state where all candidates go to pay homage).

2008 Apr 15 03:59 PM

[ValueInvestor:]

Your right, the lobbiests have way too much power in this country. They look out for the corporations and producers, not the end users or citizens of the country.

2008 Apr 15 04:20 PM

[Halp:]

Good point Value Investor- The United States will always be an importer of energy. Its a global situation now and becoming isolationist is foolish, backward thinking.
We will always be an exporter and an importer.

I think whats important is to realize that a cohesive and comprehensive energy plan be developed and we must :

1)Diversify the types of energy we rely upon
(Ethanol, Electric, Oil, Hydro..etc)

2)Diversify the sources of that energy
(Oil from the Middle East, Ethanol from Brazil and Iowa!, Natural from Canada etc..)

3) Build into our future means of transportation the flexibility to use more than one source of fuel (Flex-Fuel vehicles ?)

4) Continue to develop celulosic ethanol so as not to be entirely tied to one source. ( What if the corn or sugar cane crop fail ? (or) if political instability in a region become an issue )

Regarding ethanol (corn, sugar cane or beet) which will NEVER replace oil entirely, the future appears to be cellulosic.
"Given sufficient investment in research, development, demonstration and deployment, the report projects biorefineries producing cellulosic ethanol at a cost leaving the plant between $.59-$.91 per gallon by 2015. The price range is dependent upon plant scale and efficiency factors. At these prices, biofuels would be competitive with the wholesale price of gasoline".

2008 Apr 15 08:28 PM

[tylakewalker:]

Nice call Konrad. I increased my position in Cosan (CZZ) and I'm loving it $$$

2008 Apr 16 03:54 PM

[UserThunder...:]

CZZ was a nice play.

Mar 16 03:02 PM