It's been two weeks since Congress let the tax subsidy for American ethanol and the tariff for imported ethanol expire, and the opinions are rolling in left and right.
There is one thing everyone can agree on: With the U.S. and Brazil making up about 80 percent of the ethanol market, the big swing in per-gallon prices caused by the end of the tariff/subsidy combo will likely mean Brazil will return to exporting a significant portion of ethanol into the States.
To jump back a bit, Congress did not renew corn-based ethanol tax breaks before leaving for recess. Those subsidies have been on the books since the Energy Tax Act of 1978. The Volumetric Ethanol Excise Tax Credit stood at $0.45 per gallon when it expired on December 31. The tariff on imported ethanol also expired at the same time. That tariff amounted to $0.54 a gallon.
That means that as of the new year, foreign ethanol producers (read: Brazil) received a swing in their favor that amounts to about a buck a gallon. That's a big boost, at least on paper. How things will actually shake out is still a matter of debate.
The Brazilian contingent, naturally, is pretty happy. Mario Garnero, chairman of top Brazilian merchant bank Brasilinvest and the so-called Father of Ethanol, was enthused enough to tell a group of Parisian investors that the tariff expiration is a “milestone of historical proportions to the good of the two largest economies in the hemisphere.” Garnero was chair of Brazil's Automakers Association in the 1980s, and his support for using fuel ethanol is a big reason why 80 percent of Brazilians drive flex-fuel vehicles.
The domestic picture is a little bit hazier. U.S. ethanol producers shipped around a quarter of a billion gallons to Brazil in 2011. Despite the loss of the tax break, high sugar prices in Brazil mean the country still will likely need a fair bit of American ethanol.
Strong growth in American exports of ethanol, which are expected to top a billion gallons in 2011, once all the accounting is said and done, has kept the industry from worrying too much about the loss of the tax break, even with the continued growth of alternative biofuels. As Tom Buis, CEO of ethanol trade group Growth Energy, told The Detroit News, “The blenders' tax credit initially helped the ethanol industry develop. But today, we don't have a production problem, we have a market access problem. Without the tax credit, the ethanol industry will survive; it will continue to reduce our dependence on foreign oil, create jobs and strengthen our economy."
On the other hand, Brazil also happened to export a small volume of ethanol to the U.S. last year. EPA regulations rank sugar cane as a more environmentally friendly feedstock than corn, despite the fact that it requires transcontinental shipment -- a quirk that may push for more Brazilian imports. According to the Des Moines Register, the Energy Department estimates that the U.S. will import as much as 300 million gallons from Brazil, although the newspaper notes that some industry folk think the number will be lower.
In any case, swapping a whole bunch of ethanol with Brazil is a problematic situation. American producers will surely keep sending some ethanol Brazil's way as long as it continues paying a premium over U.S. buyers. Meanwhile, Brazil's sugar cane ethanol will find buyers in the U.S., especially in California, as long as it is rated cleaner by U.S. regulations. It's a strange and inefficient situation to be sending ethanol all over the place, and it's not necessarily environmentally friendly, but until the market or regulations change, that's the way it's going to be.