Ethanol industry in for changes

Changes in tariffs and subsidies will bring greater availability of Ethanol fuel.

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With changes in the ethanol industry, your car may get a Brazilian, without getting waxed. Two things happened at the end of 2011: Subsidies for U.S. corn-based ethanol producers ended and tariffs that artificially raised the price of Brazilian ethanol were removed.

This means that corn-based ethanol produced domestically will have to compete on its own merits without a 45¢ per gallon boost that cost taxpayers on the order of $6 billion per year.

At the same time, ethanol imports from Brazil will most certainly increase. Using sugar cane as the feedstock rather than corn is cheaper, requires less energy in the production process, and requires less land. Brazil has reduced production levels in the last few years, but this could come back if exports to the U.S. are no longer suppressed by the tariff. At present, about 150 million tpy of the country’s total capacity of 700 million tpy of cane processing capacity is idle, so there is room to ramp up output fairly quickly.

As The Economist points out, Brazil has also done its own fiddling with domestic markets to keep the price of fuels artificially low, so producers should welcome a growing global commodity market for ethanol. This will be necessary for our needs since the Energy Independence Act of 2007 is pushing for higher use of ethanol that would be hard to produce domestically without further distortion of farm commodity markets.

When I see discussions of where the ethanol industry is headed in the context of energy policy, I am reminded of a talk I had with an agribusiness economist several years ago. He pointed out that much of the ethanol industry as we know it, grew out of a simple desire by farmers to have something useful and profitable to do with excess corn inventory. From there it got a whole lot more complicated. Now producers may want to take another look at that question.