While the lowering of biofuel mandates from legislated levels in the EPA's proposed rule for the RFS in 2014 was seen as a blow to domestic ethanol and corn producers, strong ethanol exports have proven to be a bright spot for the industry. Strong margins have kept significant capacity in ethanol production, contributing to stable corn grind demand as covered by Darrel Good in a post last week. Current expectations for the 2013/14 crop year are for around 5 billion bushels of corn-for-ethanol demand. Depending on domestic ethanol use and the final RFS rule ethanol exports, continued strength in foreign demand could lead to ethanol exports in the range of 600 million to 1 billion gallons.
An important point to note is that ethanol or other biofuels produced in the US and exported for consumption overseas do not count toward the blenders' RFS obligations. The Renewable Identification Numbers (RINs) associated with exported biofuels are retired and no longer eligible for use towards RFS compliance. Thus, exports are not substituted for domestic consumption but rather represent additional demand. Ultimately, exports provide a path around, rather than through, the ethanol blend wall by allowing the domestic industry to produce greater volumes of ethanol than the blend wall limitation implies for domestic use.
Figure 1 shows monthly ethanol exports based on data provided by the Energy Information Administration. Monthly export levels have typically been in the range of 40 to 60 million gallons. Future export growth remains uncertain and will depend, as do many commodity markets, on price and policy.
The surge in exports experienced in various months during 2011 can be a bit deceptive when considering market potential. During this period, the US was both importing and exporting ethanol from Brazil. In the US, the RFS program distinguishes between sugarcane ethanol (qualifies as an advanced biofuel) and corn-based ethanol (qualifies as renewable biofuel). Brazil has its own minimum blending requirement, but does not distinguish between the ethanol they produce domestically from sugar cane and the corn-based ethanol which dominates the industry in the US. In 2011 the availability of sugar cane ethanol in Brazil was less than the needs implied by their blending requirements and US import demand. Therefore, ethanol imported from Brazil to help satisfy the advanced component of the RFS in the US was, in part, back filled with shipments of corn ethanol from the US to help satisfy Brazilian blending requirements. Brazil will continue to be an occasional export destination, when supplies are tight in the Brazilian market or when internal infrastructure bottlenecks hamper distribution, but is unlikely to provide a stable source of demand for US ethanol. Changes to the RFS proposal for 2014 make the level of cross trade seen in previous years unlikely as the requirement for advanced biofuels beyond biodiesel and cellulosic biofuels, the main driver for sugarcane ethanol imports, is minimal. Even with the limited window for Brazilian imports to meet the advanced portion of the RFS, there may still be modest import growth from Brazil to meet California's state-level low carbon fuel standard (LCFS). Imports from Brazil could potentially displace domestic corn ethanol consumption if blend wall limits are binding.