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June 19, 2020

Brazil Ethanol Producers Look to California as Alternative Market

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

With ethanol demand and ethanol prices very low in Brazil due to reduced fuel consumption caused by the Covid-19 pandemic, the ethanol sector in Brazil is in "crisis mode" and producers are looking for profitable alternatives for their products. One potential alternative is exporting Brazilian ethanol to California.

For the past nine years, the California Air Quality Board has considered Brazilian ethanol as a low carbon fuel that qualifies for carbon credits in California. Once an ethanol producer passes the process for certification as a low carbon producer, its ethanol production is eligible for premiums and carbon credits. Brazil has a similar program called RenovaBio

If the Brazilian currency is trading at 5 reals per U.S. dollar, California's carbon credit is worth approximately R$ 1 per liter. In comparison, the carbon credit for the same ethanol in Brazil is worth R$ 0.15 to R$ 0.20 per liter. Ethanol producers must then make the calculation is it better to sell to the export market or the domestic market based on a number of factors including: carbon credits, the currency exchange rates, transportation costs, the price of sugar, and logistical capacities. It is not an easy calculation, but if the Brazilian currency weakens to more than 5 reals per U.S. dollar, the export market is even more attractive.

Since the start of the pandemic, Brazilian ethanol producers have been doing a number of things in an attempt to limit losses. Many sugar mills have adjusted their production to produce more sugar and less ethanol. Other mills have hastily started to build more ethanol storage units in an effort to store the fuel until prices recuperate. Some ethanol producers have even slowed down the sugarcane harvest pace so they wouldn't over produce ethanol. If they slow down the harvest pace too much, they run the risk of not getting all the sugarcane harvested by the end of the harvest season, which generally ends in late November or early December.

The Brazilian ethanol sector is currently struggling with excess ethanol production, but that situation is not expected to last forever. In the meantime, the Brazilian research service Embrapa is conducting research on how improve productivity and profitability for sugar/ethanol producers.

One area of research they have focused on is the use of enzymes to convert sugarcane residue into what is called "second generation ethanol" or E2G. This is ethanol produced from non-crops such as cellulose. The advantage of E2G is that it significantly reduces greenhouse gas emissions and it can increase ethanol production from existing sugarcane fields without having to expand acreage.

E2G can also result in increased profits for producers. Embrapa estimates that a sugar mill with the capacity to produce 70,000 tons of E2G annually, could increase their revenue by R$ 50 million per year. Currently, many sugar mills use the sugarcane residue to generate the electricity needed to operate the mill.