Ethanol exports are a big winner for US agri-business sector. But with trade controversies, will the ethanol export boom go up in smoke?
American-produced ethanol keeps on chugging overseas, despite being embroiled in politics and trade disputes – current and potential—that pretty much span the globe and threaten to upend sales. Ethanol exports for the first quarter of 2017 hit a record 387.6 million gallons, according to data released by the Renewable Fuels Association. At that pace, export totals could eclipse 1.5 billion gallons this year, the association said, which would make 2017 by far the biggest year on record.
Corn-based ethyl alcohol, used as a gasoline additive to boost octane, became an export of particular value about six years ago. In 2009, the US became the lowest cost ethanol producer and customers around the world took note. Exports jumped from 113 million gallons in 2009 to 1.2 billion gallons in 2011, with a value in excess of $3 billion. “It went from a small component of business to a significant portion,” explained Ed Hubbard, the association’s general counsel.
Ethanol holds two advantages: It sells for a discount to gasoline, although the collapse in petroleum prices has meant that difference has narrowed. And, it’s by far the cheapest additive, which is necessary to boost octane in gasoline. (Ethanol has an octane rating of 113. The use of biofuel is mandated in the US through the Renewable Fuel Standard.)
Feedstock costs account for about 70% of a biofuel plant’s total costs. With corn prices stuck at about $3.70/bushel in the US, ethanol’s production costs remain low. Last year, American producers exported 1.05 billion gallons of ethanol. That represented the second highest total ever and a healthy 27% increase over 2015.
According to the Renewable Fuels Association, some 70% of ethanol is transported by rail from biofuel plants in the Midwest. Trucks carry another 20%, while barges up and down the Mississippi carry pretty much the remainder. A single pipeline transports ethanol in the US, a 110-mile, 16-inch pipeline that stretches from Tampa to Orlando in Florida. According to Hubbard, no other dedicated pipelines are in the works. “It would require significant investment,” he said, and “rail works so efficiently.”
Ethanol Export Controversies
US producers export ethanol to more than 50 countries. Ethanol to both Mexico and Canada is carried by rail. Rail carries ethanol to the ports of Houston and San Francisco, where it is loaded onto tankers bound overseas.
Three nations – Canada, Brazil and China – have emerged as primary destinations and last year accounted for two-thirds of all exports. Trade discord endangers all three markets.
China is the most serious. In 2016, it looked as if China would overtake Canada as the biggest destination for American ethanol. Then, early this year, Beijing raised its 5% duty on American-produced ethanol to 30%, effectively shutting down the market. The Chinese allege dumping and unfair subsidies, which American ethanol producers deny.
The dispute appears aimed at an ethanol byproduct called dry distillers grain, which is used as animal feed. China has been America’ biggest market for dry distillers grain exports. However, a record corn harvest in China last year propelled its domestic producers to push for a bigger share of the animal feed market. It seems to have prompted the Commerce Ministry to take action against American corn-based exports in general, sweeping up ethanol.
Brazil accounted last year for 26% of American ethanol exports. It’s the single largest market, but also the most complicated one. Brazil is a major ethanol producer, although its feedstock is sugar.
According to Hubbard, “we’ve had a cooperative trading relationship with Brazil,” and both the US and Brazil suspended import duties. Brazil mandates ethanol use in gasoline. American ethanol fills Brazil’s own production deficiencies, especially when, as recently, sugar prices increase and domestic producers opt for making cane syrup and sugar over competing products.
That cooperation is threatened. Brazil has had a 20% import tariff that has been suspended since 2010. Now, sugar producers in the northern part of Brazil are clamoring for the resumption of that tariff. Producers in the southern part of the country, who are more open to free trade, have nonetheless proposed a 16% tariff, based on the fact that sugar as a fuel base produces less carbon dioxide emissions.
In early May, an inter-ministerial panel, called the Chamber of Foreign Trade, put off a decision on any tariff increases until June.
Western Europe was a very viable market in the past for American ethanol producers, Hubbard said. But in 2013, the EU levied a 9.5% duty on ethanol, alleging dumping. Exports collapsed from 174 million gallons in 2012 to just 10 million last year. An EU court ruling last year annulled the duty. However, the European Commission appealed the ruling, with a decision not expected until later this year or next.
NAFTA and Ethanol
Then there are markets that could get enveloped by the Trump administration’s own protectionist trade policies toward NAFTA. Canada took up 25% of American ethanol exports last year, the second largest single market. But as Trump ratchets up anti-trade rhetoric, grain-related exports could fall victim to any escalation of conflict.
So, too, with Mexico, a market “we have been working very hard to develop,” said Hubbard. Recent Mexican legislation allows the use of ethanol, and there was hope that the corn-based fuel source would replace methyl tertiary-butyl ether, or MTBE, as an additive. MTBE is thought to contaminate ground water. However, in August, the Mexican government declared that ethanol wouldn’t be allowed in the three largest metropolitan areas in the country – Mexico City, Monterrey and Guadalajara. Now, with Trump’s threats against Mexican exports such as cars, American corn and corn-based products could become sacrificed at the altar of anti-NAFTA rhetoric.