So what is driving the large ethanol imports from Brazil? The answer is found in the details of the U.S. Renewable Fuels Standards (RFS). Brazilian sugarcane ethanol production qualifies as an "advanced" biofuel under the RFS greenhouse gas (GHG) calculations. (See earlier post for further details.) This means that the relevant economic comparison is between Brazilian ethanol and other biofuels that qualify for the advanced component of the RFS. Since the corn-based ethanol has a less favorable GHG reduction rating, it only qualifies as a "renewable" biofuel, and therefore, cannot compete with Brazilian ethanol or other advanced biofuels to fulfill the advanced mandate. To date, the only other biofuel that has been produced in quantity and qualifies to meet the advanced component of the RFS is biomass-based biodiesel. This means the relevant economic comparison is whether U.S. produced biodiesel or Brazilian produced sugarcane ethanol is the cheapest source for fulfilling obligations under the advanced RFS.

Recent price data reveals that Brazilian ethanol is by a wide margin the cheaper of the two alternatives. For example, consider a U.S. energy producer that is faced with this data on gasoline and diesel blending economics on Nov. 29, 2012:



 

CBOB is conventional gasoline blendstock, E100 is 100% anhydrous ethanol shipped to a Gulf terminal from Brazil (same as before), ULS is ultra low sulfur diesel and B100 is 100 percent biodiesel.

 

One final conversion must be done to make a fair comparison. Since biodiesel is worth 1.5 gal. of ethanol in the RFS math, we need to divide the net profit for diesel blending by 1.5 to arrive at a net profit of -1.05/1.5 = -70¢/gal. This makes biodiesel almost twice as expensive as imported Brazilian ethanol when it comes to meeting the advanced RFS mandate. And that is the reason why Brazilian ethanol imports are surging into the U.S. during recent months. They will continue to do so until the non-biodiesel part of the 2012 advanced mandate is met (about 500 million gallons total) but will not be higher since blenders are still taking a loss on each gallon of Brazilian ethanol imported.

 

Implications

Ethanol imports from Brazil have surged into the U.S. in recent months. This is not because Brazilian ethanol is cheap relative to U.S. produced ethanol; instead Brazilian ethanol is the least cost blending alternative in terms of meeting the advanced RFS biofuel mandate. This can obviously change and is something to monitor. In particular, the reinstatement of the $1/gal. tax credit for biodiesel blending, which is being tossed around the halls of the U.S. Congress, could flip the blending economics in favor of biodiesel in 2013. This could further increase the demand pressure on vegetable oil supplies and prices while at the same time providing more room for U.S. produced ethanol under the constraint of the E10 "blend wall."

 

Read the article at farmdocDaily.