MERCHANDISER
The Future of Ethanol Brazilian & US Perspectives
THE BEGINNING OF 2012 has seen significant changes in US ethanol policy. The VEETC blending credit and a tax on ethanol imports both expired on 31st
December 2011 and US
ethanol industry groups have shifted their political weight toward initiatives like E15 and advanced biofuels. Although these developments improve Brazil’s access to
the US ethanol market, the reality is that the Brazilian cane industry may struggle to fully satisfy even its own domestic demand this year owing to a sharp downturn in cane production and an uncertain outlook for output growth, according to a new report from Rabobank. Brazil became the leading importer of ethanol from
the US in 2011, a situation many would have considered unthinkable only a few years ago. Rabobank does not expect that the removal of the
US import tariff will have a large impact on US ethanol production in the near term. First, because it is likely that Brazilian ethanol prices will continue to be higher than US prices, and second because the significant duty-free ethanol imports via the Caribbean did not noticeably impact US corn ethanol production in years past. US ethanol production above the 15 billion gallon mandate
level will face volatile economics related to the spread between oil and corn prices. And if corn prices increase sharply, US lawmakers may scale back the mandate during periods of low corn stocks-to-use, say Rabobank. David Nelson, Global Strategist for Grains & Oilseeds with
Rabobank’s Food & Agribusiness Research and Advisory group says, “Despite the expiration of the tax credit and currently negative margins we expect US ethanol production
to increase slightly in 2012 as an increase in mandated levels of production offsets what we expect to be a decline in exports. The outlook for exports is heavily dependent upon what happens with the sugar crop in Brazil, the US’s biggest export competitor. Our outlook for higher US ethanol production is also predicated on regulatory approval for E15. If E15 is adopted by just 10 Midwest states, that will alleviate current blend wall restrictions.” Regarding the forthcoming 2012/13 season in Brazil, it is
far less clear that millers will maximize sugar production, as they have done for the preceding two seasons. “Indeed, if world sugar prices continue to decline in 2012, Brazilian millers may well react by increasing the share of cane that is milled for ethanol production,” say Rabobank. The most important short and medium term challenge
for the Brazilian cane industry remains bringing field productivity back to normal levels. Using 2011/12 output as a base, the Brazilian cane industry
has scope to boost cane production and processing by close to 130 million tonnes in order to maximize utilization of current installed capacity, while brown field expansion in the coming years could add anywhere between 62 and 125 million additional tonnes of capacity. “Rabobank believes that the abolition of the US import
tariff on ethanol represents a significant opportunity for the Brazilian cane sector in the medium to long term. However, in the next few years the focus of the Brazilian industry is likely to be keeping up with the growth of potential consumption in the domestic market, which will continue to rise as a result of expansion of the flex-fuel fleet,” says Andy Duff, Head of Rabobank’s Food and Agribusiness Research and Advisory group Brazil.
www.rabobank.com
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