Brazil Ethanol Sales May Drop As US Begins Exports

Brazil’s 2007-08 ethanol exports could slip to 2.5 billion liters, down about 20% from an estimated 3.1 billion liters this season, as the U.S. begins to sell ethanol abroad next year due to excess stocks, the president of sugar consultancy Datagro said Friday.

This year, the U.S. has been Brazil’s principal buyer of ethanol, in large part because of its phase-out in May of a gasoline additive, MTBE, in favor of more bio-friendly additives.

However, “the U.S. should have a surplus of ethanol between 2007 and 2008,” said Datagro President Plinio Nastari at a press luncheon. “It will only reach equilibrium in 2009.

That means that the U.S. could compete with Brazil in the industrial ethanol market, for buyers such as Japan, Korea and the EU (European Union).” In addition, the U.S. doesn’t have warehouses yet to store the ethanol – which adds an additional reason for producers to sell, he said.

Other analysts and traders in past weeks have also talked about the possibility of the U.S. competing with Brazil on the world ethanol market in coming months.

U.S. supply surpluses could certainly occur in certain areas due to an unevenly distributed countrywide ethanol infrastructure, which could lead producers to sell their excess on the export market, said Michael McDougall, the senior vice president of the Latin America desk at New York-based Fimat brokerage.

However, others pointed out that they didn’t believe that the U.S. would really be in a position to compete with Brazil.

“Occasionally, (ethanol exports) could happen, (but) I’m not worried,” said Tarcilo Rodrigues, the director of Sao Paulo-based sugar and ethanol consultancy Bioagencia. “There’s a lot that needs to happen in the U.S still. And the cost of production is more expensive there.”

Cheaper Costs

It costs an average of $0.90 per gallon to produce ethanol in Brazil, while it costs between $1.10 to $1.40 per gallon to produce ethanol in the U.S., according to Datagro calculations.

At the same time, Brazilian ethanol is cost-competitive with gasoline as long as world oil prices are above $37 per barrel, and the Brazilian real is at 2.20 per dollar, said Nastari.

Other analysts, such as Bioagencia, have put that figure at closer to $45 per barrel. In stark contrast, however, U.S. corn-based ethanol production is economically viable with gasoline only when world oil prices are at $55 per barrel, said McDougall.

Meanwhile, Brazilian millers also have the enormous advantage of being able to sell their ethanol to the country’s rapidly growing fleet of flex-fuel cars, which can run on any combination of ethanol or gasoline, say local traders.

“Our principal market is the domestic market,” said Rodrigues, pointing out that flex-fuel car sales have now grown to account for over 75% of all new car sales in Brazil.

Different Markets

Still, Brazilian millers will have to face a changing market in the next two years, warned Nastari. For starters, “there isn’t likely to be direct ethanol shipments from Brazil to the U.S. next year,” he said.

In the first nine months of this year, by contrast, the U.S. imported a staggering 1.3 billion liters direct from Brazil, or 57% of Brazil’s total ethanol exports, despite a hefty U.S. 54 cent-per-gallon tariff on direct ethanol imports, according to data from the Agricultural Ministry.

In addition, the U.S. also bought just under 300 million liters duty-free via the Caribbean, due to an agreement signed in the 1980s between the U.S. and participating countries known as the Caribbean Basin Initiative, or CBI. In 2007, “ethanol will probably be shipped still to the U.S. via the Caribbean next year,” said Nastari.

“But there will be other markets that open up.” For one, Brazil’s state-owned oil firm Petrobras has already signed deals with Nigeria and Venezuela, which should help boost the country’s ethanol volumes next year, he noted.

“There will also be a resurgence in the market of Japan and Korea, who shied away this year when prices rose,” he said. If Brazil exports roughly 2.5 billion liters in the upcoming 2007-08 season, then it will return to the same levels exported in the 2005-06 season.

That year, India was a principal buyer of Brazilian ethanol, due to a drought that sharply cut into its sugarcane production. Brazil is the world’s leading sugar producer and exporter. It is also the world’s No. 2 ethanol producer after the U.S., but No. 1 ethanol exporter.