Brazilian Ethanol

As high corn prices continue to pressure U.S. ethanol companies, Brazilian competitors see a window of opportunity this summer for their home-grown ethanol made from less-expensive sugarcane.

“Demand from oil companies for Brazilian ethanol is very high right now,” said Eduardo Correa, a trade manager at Brazilian ethanol exporter Equipav Milling Group. “There’s going to be plenty of opportunities for us to export this summer, either directly or through the Caribbean,” Correa said.

There are a number of reasons for this possibility, according to a number of ethanol buyers and sellers in the U.S. and Brazil. First, Brazil is currently harvesting a record-breaking sugarcane crop, easily over 500 million metric tons, according to industry analysts at Datagro in Sao Paulo. The sheer volume of cane alone, and the estimated 20 billion liters or more of ethanol that’s going to be made from it, is going to push Brazilian ethanol prices lower.

Current wholesale prices are around $1.64 a gallon, according to the University of Sao Paulo’s rural economy think tank Cepea/Esalq. Even with a 54-cent tariff imposed on Brazilian ethanol exports, Brazil wholesale hydrous ethanol prices comes out to be around $2.18 per gallon compared to around $2.55 per gallon on average for U.S. ethanol today.

“I think we are going to see record ethanol production this year in Brazil, while the U.S. ethanol producers are struggling to make a profit,” said Antonio Augusto Duva, a soft commodities manager at BNP Paribas bank in Sao Paulo. “The (Brazilian) industry’s hope, and this might be wishful thinking on their part, is that lower prices here and high gas prices there could result in big ethanol exports to the U.S.,” he said.

Another reason is that high corn prices — hovering near $6 per bushel on the Chicago Board of Trade — means U.S. corn ethanol producers are facing very tight profit margins, if they have any profit margin to speak of. Corn prices shot up last week when the U.S. Department of Agriculture reported an 8% expected drop in U.S. corn plantings to 86 million acres this season. “At these prices, a lot of ethanol producers are on the edge. You get bad weather this summer and the crop looks bad, and suddenly prices go to $7.

That would be impossible for U.S. ethanol companies,” said Joseph Petrowski, chief executive of Gulf Oil in Boston. Nevertheless, the U.S. has mandated ethanol use. So ethanol isn’t just going to vanish if corn prices stay at these levels and ethanol companies start to go bankrupt as did Kansas-based Ethanex Energy Inc. (EHTE) on March 25.

Gulf Oil alone is opening up 10 new E10 gas stations in New York and an E85 ethanol service station in Massachusetts next month. E10 is a 10% mix of ethanol with traditional gasoline and E85 is an 85% blend. Gulf Oil blends ethanol with around 20,000 barrels of oil per day in the Northeast.

Given the current pricing scenario for corn futures, corn ethanol prices will likely rise to around $2.80 per gallon, Petrowski estimated. With the 50-cent U.S. tax credit on ethanol, that still makes ethanol much cheaper than gasoline, but it is not going to be make it cheaper than Brazilian ethanol.

“If you take the tax break away from ethanol, it becomes a complete money-losing operation,” said Marty Magida, managing director of Trenwith Securities LLC, a middle market investment bank specializing in renewable energy.

“The jury seems to be out on corn ethanol, and it’s not a good verdict,” Magida said. Brazil is the world’s only ethanol exporter and No. 2 producer behind the U.S. Last year, it exported around 3.4 billion liters of fuel-grade ethanol to Europe and the U.S. Both the U.S. and Brazil have joined forces under the auspices of the Inter-American Development Bank to create a quasi-joint lobbying effort to convince other nations to produce or buy ethanol. The argument was that it was good for the environment and provided a relief to high oil prices, currently around $108 a barrel.

High Prices Also Draw Out Ethanol Critics

As corn prices rise in the U.S., ethanol faces an onslaught of attacks from critics. Even Brazil has not been exempt from the anti-ethanol movement, with European and American public opinion leaders saying Brazil deforests to grow sugarcane.

Over 90% of Brazil’s sugarcane crop is grown in the center-south, thousands of miles away from any tropical forests, according to the Sao Paulo Sugarcane Industries Union, or Unica. However, as much of a beating ethanol has taken lately, the U.S. mandate guarantees a steady supply of ethanol to fill U.S. gas tanks. The 2007 Energy Bill calls for 15 billion gallons of corn ethanol, with another 15 billion or so coming from other sources, including Brazil’s sugarcane ethanol. Unless those mandates are canceled, Brazil’s ethanol might have a bright future in the U.S. with or without high corn prices.

“The U.S. (renewable fuels standard) wants a lot of ethanol and we are not going to be able to produce it all here, not now anyway,” said Karl Doenges, vice president and general manager, of CleanFUELS USA, a turnkey ethanol company working with distributors in Texas. “The RFS is really Brazil’s big opportunity. We are not going to have enough ethanol to meet the RFS mandates, so we are going to have to get it from corn, sugarcane in Brazil, cellulosic ethanol. Whatever we can get our hands on.

Plus the tariff on Brazil ends next year,” he said. “I’d be very bullish on long-term ethanol prospects.” If ethanol wasn’t in the market, Petrowski estimates the U.S. would have to find about 600,000 barrels of oil a day to replace it. “If you have to go into the market and look for 600,000 barrels of equivalent oil to replace ethanol, imagine what that would do to the price of gasoline,” Petrowski said. “It won’t be a food crisis and it’ll be much more than just ethanol producers who are having a problem; we’ll have a bonafide gasoline crisis on our hands.” Brazil ethanol producers, in that case, would like to come to the rescue.

“If the U.S. doesn’t go into a really bad recession, gas and ethanol prices will rise, at least that’s what we are hoping,” said Joao Val, chief financial officer at Sao Martinho SA (SMTO3.BR), one of Brazil’s leading ethanol producers. “But whether that scenario plays itself out in the U.S., nobody really knows.” Correa has his own take on the matter. “Brazil is going to be much more aggressive this summer in trying to sell ethanol because of higher prices in the U.S.,” he said.