Every day supertankers full of $100 per barrel oil are docking at US ports where other supertankers full of $1 per gallon ethanol have just departed for overseas markets. 

While some folks have trouble understanding the economics of the exchange, others are happy there is a thriving ethanol industry in the US and a global market for it.  It adds value to corn, and somewhere around the world, motorists would rather have the lesser expensive motor fuel and let the US motoring public pay for the more expensive commodity.  Maybe, there is someone, somewhere who can make sense of this. But in the meantime, ethanol has a market.

The “blend wall” is that sky high object that ethanol ran head long into some months back when the 10% limit was reached in the nation’s motor fuel supply.  Currently, the recession has reduced demand to about 135 billion gallons per year, and 13.5 billion gallons of ethanol is the maximum that can be blended into regular gasoline.  We are there, but that is less than the 14.75 billion gallon capacity of the US ethanol industry, so what can be done with the excess?

Iowa State University economist Bob Wisner says exports are the way that ethanol can scale the blend wall and escape the chains of the Renewable Fuel Standard (RFS.)  Wisner’s latest renewable energy newsletter says there is a glut of ethanol:  storage facilities are full, gasoline use is down, ethanol returns are negative, and some plants have begun to close. 

One safety valve would be E-15 or 15% ethanol blends, or E-85, an 85% blend, but merchandisers have not been anxious to install those pumps.  One of the problems is the restrictions on EPA’s latest approval for E-15, and another is Detroit’s reluctance to build cars for higher levels of ethanol fuel.  Wisner says with E-85 mileage about 24% to 28% less than gasoline, it needs to be priced 25% less than regular, but with the loss of the blenders’ credit, it will be difficult to achieve that savings at the pump.

Lower pricing of ethanol would unlock the price of corn from the price of crude oil, but Wisner says that lower price would have to be shared by corn growers, land owners, and ethanol plant operators.  Subsequently, the export market has been a good alternative to get around the blend wall.  For the 12 month period ending last November, the US exported 1.094 bil. gallons of ethanol, equal to 400 mil. bu. of corn.  He says after adjusting for DDGS replacement that added 25¢ to 30¢ to a bushel of corn.  With that level of exports, the US replaced Brazil as the largest exporter and that tenure will depend on Brazil’s use of sugarcane to make sugar or ethanol, the relationship between the dollar and the Brazilian real, foreign mandates for ethanol use, and the relationship between ethanol and gasoline prices.

With 6% of ethanol production being exported, that is one gallon of every 16 refined, which is a significant market.  Canada has been the leading market and purchased 239 mil. gals in 2011.  The EU was second, followed by Jamaica and Brazil. 

A group of 57 other nations came in 5th place indicating a broad demand for some volume of ethanol.  Canadian ethanol production was about 357 mil. gal. and its total demand is increasing annually, with supplies also coming from waste product refineries.  Canada has a mandate for E-5 in the motor fuel, but different provinces have various internal levels mandated.  To meet the demand, Canada would need 525 mil. gal. per year, with part of that to be filled by imported US ethanol, before it meets a blend wall also.

The European Union’s imports increased sharply in 2011 to 227 mil. gal. in an effort to meet its internal 10% blend mandate.  The United Arab Emirates became a significant market in 2011, and Mexico has been increasing its imports.

Brazil is the wild card, since its once large exports were exchanged for imports when sugar prices were higher and it was more profitable to export sugar and buy ethanol.  That is changing and in recent days Brazil has indicated its intention to reduce sugar production, increase ethanol production, and return to exporting it.

Jamaica has been the Caribbean ethanol broker, since it could export ethanol to the US without a duty and had been resale point for Brazilian ethanol before the tariff expired at the end of 2011.  Corn and sugar economics were working against the Jamaican ethanol refineries and its plants have recently closed and its future is uncertain at best.

Wisner says US ethanol exports are a small share of the total market, but have grown rapidly and helping an industry with a saturated market.  The exports are primarily to neighboring countries, and to markets with mandates for ethanol use.  But in the longer term, US ethanol exports will compete at times with Brazil.  However, he says the rising price of gasoline will likely spur many nations to come to the US for ethanol, since we may have plenty to sell.  (Too bad we are not using it, instead of selling it.)

US ethanol capacity exceeds the demand, and an outlet for excess ethanol has been the export market, since many nations have mandates to use ethanol, or want to replace higher priced gasoline with ethanol.  Higher percentages of ethanol use in the US have not yet been implemented with success.  The primary ethanol market for the past year has been Brazil which will become the primary competitor; due fluctuating sugar prices that now make ethanol exports more lucrative.

Source: FarmGate blog