August 3, 2011

U. S. Ethanol Exports to Brazil Expected to Continue Increasing

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

I realize that we are in the midst of the U.S. growing season, but recent reports from Brazil concerning their declining sugarcane production could have a bearing on corn usage here in the U.S. The problem in Brazil is that ethanol production has been increasing at a slower pace than domestic consumption. To make up the difference, Brazil has been importing increasing quantities of ethanol and the trend is expected to accelerate in the future. Most of the imported ethanol comes from the U.S., thus the connection with corn usage here in the United States.

Policy makers in Brazil are so concerned about this trend that they significantly increased the amount of credit available for increased sugarcane production in 2011. Even though there may be more credit available, the long term nature of sugarcane production and the expense of building new sugar/ethanol mills means that it will take many years to reverse this trend and in the mean time, the U.S. will continue to export increasing quantities of ethanol to Brazil.

There are currently 426 sugar/ethanol mills in Brazil and the pace of new construction has slowed significantly in recent years. In 2008 thirty new mills were opened, in 2009 that fell to 19, ten new mills opened in 2010 and only 4 are scheduled to open in 2011.

According to the consulting firm Projeto Brasil Sustentaval (Sustainable Brazil Project) that specializes in the Brazilian sugar/ethanol sector, over the next five sugarcane harvests, the total sugarcane tonnage will be 25% less than the domestic demand. The annual sugarcane tonnage for the next five years is expected to average 780 million tons while the domestic demand will average 980 million tons. If you project out ten years, the situation gets even worse. During the next ten harvests, the sugarcane tonnage is expected to average 970 million tons when the domestic demand is expected to average 1.3 billion tons.

If this scenario actually does unfold, in the year 2021 the amount of ethanol produced in Brazil will be 40% less than the domestic demand. The deficits in ethanol production is expected to lead to higher ethanol prices, a lower percentage of ethanol blended into gasoline, increased use of gasoline, and increased ethanol imports. This trend is already being seen at Brazilian gas stations. Over the last twelve months, the price of ethanol has increased 29% while gasoline prices have increased only 7.7%. What is particularly worrisome is the fact that ethanol prices normally decline this time of the year when the harvest is in full swing, instead they have been increasing.

There are currently 7 million hectares of sugarcane production in Brazil. This represents 2% of Brazil's arable land area. Prior to the financial crisis of 2008, sugarcane acreage was increasing at an annual rate of approximately 10% per year. Since the financial crisis, sugarcane production has increased at only 2% or 3% per year. This increase is not enough to keep pace with the increasing number of flex fuel vehicles on Brazilian highways. Over 90% of all new car sales in Brazil are flex fuel vehicles and as a result, the domestic demand for ethanol has increased 300% over the last ten years.

The combination of lower sugarcane production and more emphasis on producing sugar instead of ethanol (due to high sugar prices) the production of ethanol this year is actually expected to decline. During the 2010/11 growing season, Brazil produced 25.3 billion liters of ethanol. That is expected to fall to 22.5 billion liters in 2011/12. As a result, Brazil has already imported 400 million liters of ethanol in 2011 and they are expected to import another 250 million liters before the start of the next sugarcane harvest in March of 2012.

Most of those imports came from the U.S. with the remainder coming from Europe. The U.S. Energy Information Administration indicated that the U.S. exported 351 million liters (2.22 million barrels) of ethanol to Brazil from February to April of this year.

U.S. exports of ethanol to Brazil are expected to continue increasing for the foreseeable future. Therefore, even if all the subsidies, credits, tariffs, etc. for U.S. ethanol production are eliminated, the export demand for ethanol could help keep the ethanol sector healthy in the coming years - thus the connection to corn usage here in the U.S.