What's Driving the Surge in Ethanol Imports?

With ethanol production margins under pressure in recent months there has been an understandable search for explanations. One widely discussed factor is the recent surge in "cheap" imports of ethanol to the U.S. from Brazil. As the chart documents, the volume of ethanol imports to the U.S. definitely has risen notably in the in the last few months. Total imports during January-May 2012 totaled only 43 million gallons, but increased over five-fold to 235 million gallons over June-September. It is important to keep in mind that ethanol imports have actually been much larger in the past. The U.S. imported a total of 1.7 billion gallons of ethanol in 2006-2008, mainly due to an immediate need to replace MTBE as an oxygenate in our motor fuel gasoline supply.

It is easy to answer the question of where all the ethanol imports come from. The U.S. and Brazil produce about 90% of the ethanol in the world, so Brazil has been the source of virtually all ethanol imports to the U.S. (Official statistics show some imports coming from Caribbean countries but this is just the re-export of Brazilian ethanol through these countries for tariff and logistical reasons.) It is also easy to answer the question of when the ethanol imports occur. Brazilian ethanol is made from sugarcane and the cane harvest season is roughly from mid-June to mid-December, so the bulk of ethanol supplies for export to the U.S. are available in the second half of the calendar year.

The question of why such large quantities of ethanol imports have been coming to the U.S. from Brazil in recent months is not as simple, but there is an answer. First of all, the answer is NOT that Brazilian ethanol is cheap relative to U.S. produced ethanol, as many apparently believe. This can be disproved rather straightforwardly. The price of U.S. produced ethanol at Gulf terminals on Nov. 29, 2012 was $2.60/gal. On the same day, the price of (anhydrous) ethanol F.O.B. at the Brazilian port of Santos was $2.65/gal. Assuming freight costs are 20¢/gal., the landed cost of Brazilian ethanol to the U.S. Gulf was $2.85. No U.S. gasoline blender would have purchased Brazilian ethanol based on market economics because it would have resulted in a net loss of 25¢/gal. compared to purchasing U.S. produced ethanol at the same location.