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By Robert Rapier on Mar 6, 2012 with 20 responses

Ethanol Exports and the Future of the Ethanol Industry

Were U.S. Taxpayers Subsidizing Ethanol Exports?

Over the past couple of years, U.S. ethanol exports have soared. Last year a news article in Financial Times charged that these exports were being subsidized with U.S. tax dollars. The U.S. ethanol industry strongly denied this, but I wrote several articles on the controversy:

Taxpayer Subsidized Ethanol Exports May Bite Industry in the Future

Clarifying Misconceptions on Taxpayer-Subsidized Ethanol Exports

Ethanol Exports Increase Dependence on Foreign Oil

To be clear, it wasn’t the exporting of ethanol that concerned me, it was the idea that taxpayers were potentially subsidizing the practice. Although many ethanol proponents denied it, I said at the time that we would know soon enough, because if ethanol exports fell once the tax credits expired at the end of 2011, that would be strong evidence that exports had indeed been benefiting from those tax credits.

Reports that Exports Plummet as Tax Credit Expires

Early indications are that 2012 ethanol exports have plummeted, although the weakness in the Brazilian currency is being blamed.

U.S. ethanol stocks rise, demand falls

U.S. ethanol exports reached a record 1.2 billion gallons in 2011, more than triple the 2010 export total of 396 million gallons, according to the Renewable Fuels Association.

The export market may be losing steam, however. Official statistics for January aren’t yet available, but ADM, Green Plains and the Renewable Fuels Association have all in recent weeks said they expect 2012 exports to fall by half as a weakened Brazilian currency gives importers there less buying power. About 40% of all U.S. ethanol exports went to Brazil last year.

I don’t think the currency is actually to blame, however, as the exchange ratio between the Brazilian Real (BRL) and the US Dollar (USD) was almost the same in January as it was last November. So far in February, the exchange rate has been more favorable for Brazil than it was most of the 2nd half of 2011.

The cutting of the ethanol tax credit has impacted profits, which would be expected in an oversupplied market:

Fuel blenders had since 2004 enjoyed a subsidy that awarded them 45 cents for every gallon of ethanol they blended into motor gasoline, driving up demand for the biofuel. That subsidy expired at the end of 2011. Added production ahead of the subsidy’s end helped build ethanol inventories to an all-time high of 21 million barrels during the first week of February, up 7% from a year ago, according to federal data. Previous gluts have usually resolved themselves by demand growing each year as federal requirements for ethanol uses continued to kick in. But producers already are blending retail gasoline with 10% ethanol, leaving little room for additional gains under government mandates.

In one example of how low margins have fallen, Valero Energy Corp. (VLO), the largest independent refiner in the U.S. and one of the largest ethanol producers in the U.S. by volume, saw profit margins in January dwindle to a “pretty weak” 5 cents a gallon or less, compared with 56 cents a gallon at the end of December, S. Eugene Edwards, Valero’s chief development officer, said during a call with investors.

I continue to believe that the future of the U.S. ethanol industry hinges on growing E85 demand, and not on the export market. Here is an excerpt from my book Power Plays — which is scheduled to be published in 3 weeks — describing one solution that Midwestern states could adopt:

States with a lot of ethanol production may benefit from passing statewide tax incentives designed to incentivize local use of ethanol. In Chapter 9, I discussed the potential benefits of shifting federal income taxes to gasoline taxes. This could also be carried out on a state level. Iowa, for instance, has a state sales tax, an income tax, and property taxes. If the state could implement a higher tax on gasoline, it could keep the tax burden constant by lowering any or all of the other taxes. The benefit would be to make E85 in Iowa more consistently price competitive with gasoline, which would make the state more energy independent. The local economy would also be more resilient as more dollars that are spent on fuel would stay in the state, supporting local farmers, ethanol plants, and related businesses.

In my opinion, failure to grow the E85 markets will continue to stunt the growth of the U.S. ethanol industry. The ethanol industry has tried to grow their markets by increasing exports and lobbying for E15 in the fuel supply. Neither of those solutions, in my view, have the appeal or growth potential of developing a robust E85 transportation infrastructure in the Midwest.

  1. By Rufus on March 7, 2012 at 9:24 am

    Let’s don’t overlook the fact that on the very day that we were lifting Our import tax on ethanol, Brazil was Re-instituting Theirs.

    Also, to consider, is that the USDA is expecting the price of corn to drop by about $2.00 this year.  That will lower the price of Ethanol by about $0.50 per gallon, bringing the Summer Blend down to around $2.25/gallon.

    Right now, we really, really need a high-compression, E85-optimized engine for sale in states like Minnesota, where one out of every five, or so, filling stations sell E85.  Most people don’t realize that an ethanol-optimized engine can deliver the same mpg, and power from a gallon of ethanol that our present engines can deliver from a gallon of gasoline.

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    • By Robert Rapier on March 8, 2012 at 1:38 pm

      Right now, we really, really need a high-compression, E85-optimized engine for sale in states like Minnesota,

      By the way, I specifically mention this in my book. I have a chapter dedicated to corn ethanol, and I discuss the prospects for high-compression E85 engines. I am doing the final read through of that chapter today (just checking for typos at this point).

      RR

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    • By Robert Rapier on March 8, 2012 at 1:44 pm

      I had a thought. One of the issues with optimizing E85 engines for ethanol is that the high compression ratios may make them unsuitable for straight gasoline. I wonder if you could create an E85/diesel hybrid sort of engine? The diesel would have no issue with preignition.

      RR

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      • By Russ Finley on March 8, 2012 at 2:41 pm

        The diesel would have no issue with preignition.

        But the engine would have lots of other issues, like injectors handling fuels with  different viscosity, fuel filters being cleaned out by ethanol  etc, etc.

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  2. By Floyd the Barber on March 7, 2012 at 9:51 am

    It’s ironic and telling that you boisterously declared “Ethanol Exports Increase Dependence on Foreign Oil” on Jan. 6 and then THREE DAYS LATER wrote a post asking “What’s So Bad About Exporting Gasoline?” and patriotically proclaimed that exporting prodigous supplies of gasoline “creates jobs and tax revenue” for Americans. Typical hypocrisy. Yes, ethanol exports in January are likely to be lower than they were in December. So what? That’s largely a function of currency fluctuations and, moreso, the fact that January-February have ALWAYS been slow months for exports to Brazil. We’ll see what happens in March/April/May as Brazil enters its inter-harvest period and finds itself short on ethanol again. So lower exports in January prove NOTHING about your claim that exports were being subsidized. Lower exports prove only that there was lower demand for exports.

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    • By Robert Rapier on March 7, 2012 at 12:13 pm

      THREE DAYS LATER wrote a post asking…

      First, check the date. It was a year and three days later. Getting facts straight is important, because if you start missing details, you start missing the point. But that’s not the point…

      patriotically proclaimed that exporting prodigous supplies of gasoline “creates jobs and tax revenue” for Americans. Typical hypocrisy.

      Hypocrisy? Maybe my position is just a bit too subtle for you to understand, so I will repeat it (as I did again in this article). I don’t care if they are exporting ethanol; in fact I am in favor of that if it keeps the lights on. But we should not be giving a tax credit to gallons of ethanol with the promise that it will benefit taxpayers by reducing dependence on foreign oil — and then turn around and export that ethanol. I have said the same thing about oil. If we pay a subsidy on a gallon of gasoline, I don’t support us turning around and exporting the gasoline.

      So, do you still want to claim hypocrisy? Or did you maybe jump to conclusions?

      That’s largely a function of currency fluctuations…

      As I pointed out, the currency in January is where it was in November. And it is more favorable than it was for most of the last half of the year.

      RR

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  3. By Rufus on March 7, 2012 at 9:59 am

    Again, it’s basically a function of Brazil re-instituting the Import Tax on Ethanol.

    By the way, Brazil just announced a <b>$30+ Billion Government Initiative</b> to aid/expand Its Ethanol Industry.

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  4. By Floyd the Barber on March 7, 2012 at 11:16 am

    Rufus,

    You are right. Part of the reason exports to Brazil may be down is that they have re-instituted a value-added tax only on imported ethanol, while continuing the exemption of this tax for domestically produced ethanol.

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    • By Robert Rapier on March 7, 2012 at 12:18 pm


      Part of the reason exports to Brazil may be down is that they have re-instituted a value-added tax only on imported ethanol

      Do you have a link to that? I have a report from the USDA FAS called Biofuels – Ethanol Import Tariff Brazil that says:

      In December 2011, the Government of Brazil extended the zero import tariff applied to ethanol to December 31, 2015.

      RR
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  5. By Rufus on March 7, 2012 at 11:28 am

    Oh, and, also, Brazil lowered the required ethanol content of their gasoline.

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  6. By Rufus on March 7, 2012 at 12:53 pm

    I’ll be danged.  It looks like they Did extend that zero import tariff thingy.  Good for them.

    While I was looking around, I ran into an article that stated that, with sugar prices falling, more of the Brazilian Cane will likely be refined into ethanol.

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    • By Robert Rapier on March 7, 2012 at 1:16 pm

      So now that we know that it wasn’t the tariff, and we know that the currency in January is where it was in November, do we want to keep looking for other suspects, or do we want to start to consider the obvious suspect that I named in this article?

      RR

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  7. By Rufus on March 7, 2012 at 1:28 pm

    Actually, I’m a little suspicious of your “suspect,” Robert.  :)

    I would be more likely to look at reduced percentage of ethanol in the fuel, and, possibly, a changing ratio between sugar, and ethanol, production.

    Also, they kind of waited till the last minute (last month, anyway) to extend the import tax hiatus;  the market may not be able to react that quickly.

    But, energy markets Are complex.  The correct answer might be “All of the above,” plus some. 

    Or, mebbe, you’re just one hundred and one percent keerect.  Who know?  :)

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    • By Robert Rapier on March 7, 2012 at 1:37 pm

      I am really more curious whether Floyd will show back up here and acknowledge his errors. If not, it would not be the first time he slung mud and then didn’t hang around to defend it.

      RR

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  8. By Andre Comparini on March 7, 2012 at 5:52 pm

    RR,

    I’ve been reading your column for many months now and have found it to be very informative, even for someone with almost no O&G/Energy knowledge or practical experience. I especially appreciate the balanced approach you take in your articles.

    I agree that the evidence seems to indicate that subsidized ethanol was being exported. Particularly telling is the following quote you included:

    Official statistics for January aren’t yet available, but ADM, Green Plains and the Renewable Fuels Association have all in recent weeks said they expect 2012 exports to fall by half as a weakened Brazilian currency gives importers there less buying power. About 40% of all U.S. ethanol exports went to Brazil last year.

    This blurb and the seeming general consensus within the comments that Brazil is almost entirely to blame for this decrease lead me to the conclusion that exports to Brazil would have to have ceased in January, a fact that I doubt would go unnoticed or unmentioned.

    My logic is that if exports decreased ~50%  and Brazil, the (seemingly) primary factor in this decrease, accounts for ~40% of exports, Brazil has suddenly stopped almost all ethanol imports.

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    • By Andre Comparini on March 8, 2012 at 1:58 pm

      I think I failed to complete my thought in my post above…

       

      Based on the logic above, it is highly improbable that Brazil has suddenly and unexpectedly stopped imports without anyone noticing, which leads me to conclude that the drop in ethanol exports is indeed due to the end of the US ethanol subsidy program

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  9. By Eric Energy on March 9, 2012 at 11:18 am

    Hi Robert

    A few questions for you:

    1) Why exactly is Brazil importing so much of our ethanol?  I know that Brazilian-produced ethanol, made from sugar cane, is about seven times as efficient as our corn-based product.  Do they simply not have enough?

    2)  If it is a low supply/high demand problem, can Brazil mix the two fuels to create a middle-of-the-pack type product, and do you know if this is a common procedure?

    3)  Will ethanol subsidy information ever be released by the US government, or must we simply hypothesize on this issue forever?

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  10. By Robert Rapier on March 9, 2012 at 2:25 pm

    1) Why exactly is Brazil importing so much of our ethanol?

    Mainly because sugar prices have risen so high that it makes more economic sense for them to make sugar instead of turn it into ethanol. So feedstock prices for ethanol producers have skyrocketed, making corn ethanol cheaper currently than sugarcane ethanol.

    If it is a low supply/high demand problem, can Brazil mix the two fuels to create a middle-of-the-pack type product, and do you know if this is a common procedure?

    The product is exactly the same. So sure, they could mix corn ethanol and sugarcane ethanol. It’s just that sugarcane ethanol costs a lot more right now.

    Will ethanol subsidy information ever be released by the US government, or must we simply hypothesize on this issue forever?

    That’s an interesting question, and I had never thought about it. EPA does release this information, and in fact if I am reading it correctly it shows that tax credits were paid on 13.6 billion gallons of ethanol production in 2011. According to the RFA, 13.9 billion gallons of ethanol were produced in 2011, so it would appear that if 1.2 billion gallons of ethanol were exported (as the RFA also reported), then indeed taxpayers subsidized the export of ethanol.

    RR

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  11. By Ellen Carpenter on March 9, 2012 at 7:03 pm

    Mr. Rapier,

    The information you cited from EPA has nothing to do with gallons qualifying for the volumetric ethanol excise tax credit (VEETC). The EPA data you cited tracks Renewable Identification Number (RIN) credits (which are worthless) for RFS compliance. So to imply that the EPA information somehow is evidence that “…indeed taxpayers subsidized the export of ethanol…” is quite confounding and extremely misleading.

    In response to: “Will ethanol subsidy information ever be released by the US government, or must we simply hypothesize on this issue forever?”

    I’m not sure what’s so hard about estimating the cost of the ethanol subsidy. It was 45 cents per gallon, so $0.45 x gallons production = total foregone revenue. But, the tax credit expired at the end of 2011, so there isn’t any “subsidy information” to be released for 2012.

    In looking at the RFA link you provided on 2011 total exports, I see they also posted a story today about January 2012 exports. The story says exports were strong in Jan. 2012 (strongest ever for January) following the expiration of the tax credit, so I’m not sure what all the hub-bub is about.

    Best,

    Ellen

     

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    • By Robert Rapier on March 9, 2012 at 7:52 pm

      The information you cited from EPA has nothing to do with gallons qualifying for the volumetric ethanol excise tax credit (VEETC). The EPA data you cited tracks Renewable Identification Number (RIN) credits (which are worthless) for RFS compliance.

      My understanding was that they used the RINs to determine how to pay the VEETC. If not, then how do they determine which ethanol was eligible for the credit? How would they differentiate between ethanol used domestically and ethanol destined for export?

      I’m not sure what’s so hard about estimating the cost of the ethanol subsidy. It was 45 cents per gallon, so $0.45 x gallons production = total foregone revenue.

      No. The issue is that many in the ethanol industry denied that any subsidy was being paid on exported ethanol. But if we knew the total that was actually paid out and the total amount of ethanol production — we could in fact make a pretty good determination if the amount that was paid out seems to have been more than would be warranted by the ethanol that was used domestically.

      The story says exports were strong in Jan. 2012 (strongest ever for January) following the expiration of the tax credit, so I’m not sure what all the hub-bub is about.

      The fact that exports plummeted between December and January, and look to plummet again in February. If you have an OPIS subscription, they just sent out a note that quoted a trader saying that VEETC barrels were still being exported in January, but that they are mostly gone and that February will see another big drop. So that’s the issue.

      RR

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