Ethanol Exports and the Future of the Ethanol Industry

Were U.S. Taxpayers Subsidizing Ethanol Exports?

Over the past couple of years, U.S. ethanol exports have soared. Last year a news article in Financial Times charged that these exports were being subsidized with U.S. tax dollars. The U.S. ethanol industry strongly denied this, but I wrote several articles on the controversy:

Taxpayer Subsidized Ethanol Exports May Bite Industry in the Future

Clarifying Misconceptions on Taxpayer-Subsidized Ethanol Exports

Ethanol Exports Increase Dependence on Foreign Oil

To be clear, it wasn’t the exporting of ethanol that concerned me, it was the idea that taxpayers were potentially subsidizing the practice. Although many ethanol proponents denied it, I said at the time that we would know soon enough, because if ethanol exports fell once the tax credits expired at the end of 2011, that would be strong evidence that exports had indeed been benefiting from those tax credits.

Reports that Exports Plummet as Tax Credit Expires

Early indications are that 2012 ethanol exports have plummeted, although the weakness in the Brazilian currency is being blamed.

U.S. ethanol stocks rise, demand falls

U.S. ethanol exports reached a record 1.2 billion gallons in 2011, more than triple the 2010 export total of 396 million gallons, according to the Renewable Fuels Association.

The export market may be losing steam, however. Official statistics for January aren’t yet available, but ADM, Green Plains and the Renewable Fuels Association have all in recent weeks said they expect 2012 exports to fall by half as a weakened Brazilian currency gives importers there less buying power. About 40% of all U.S. ethanol exports went to Brazil last year.

I don’t think the currency is actually to blame, however, as the exchange ratio between the Brazilian Real (BRL) and the US Dollar (USD) was almost the same in January as it was last November. So far in February, the exchange rate has been more favorable for Brazil than it was most of the 2nd half of 2011.

The cutting of the ethanol tax credit has impacted profits, which would be expected in an oversupplied market:

Fuel blenders had since 2004 enjoyed a subsidy that awarded them 45 cents for every gallon of ethanol they blended into motor gasoline, driving up demand for the biofuel. That subsidy expired at the end of 2011. Added production ahead of the subsidy’s end helped build ethanol inventories to an all-time high of 21 million barrels during the first week of February, up 7% from a year ago, according to federal data. Previous gluts have usually resolved themselves by demand growing each year as federal requirements for ethanol uses continued to kick in. But producers already are blending retail gasoline with 10% ethanol, leaving little room for additional gains under government mandates.

In one example of how low margins have fallen, Valero Energy Corp. (VLO), the largest independent refiner in the U.S. and one of the largest ethanol producers in the U.S. by volume, saw profit margins in January dwindle to a “pretty weak” 5 cents a gallon or less, compared with 56 cents a gallon at the end of December, S. Eugene Edwards, Valero’s chief development officer, said during a call with investors.

I continue to believe that the future of the U.S. ethanol industry hinges on growing E85 demand, and not on the export market. Here is an excerpt from my book Power Plays — which is scheduled to be published in 3 weeks — describing one solution that Midwestern states could adopt:

States with a lot of ethanol production may benefit from passing statewide tax incentives designed to incentivize local use of ethanol. In Chapter 9, I discussed the potential benefits of shifting federal income taxes to gasoline taxes. This could also be carried out on a state level. Iowa, for instance, has a state sales tax, an income tax, and property taxes. If the state could implement a higher tax on gasoline, it could keep the tax burden constant by lowering any or all of the other taxes. The benefit would be to make E85 in Iowa more consistently price competitive with gasoline, which would make the state more energy independent. The local economy would also be more resilient as more dollars that are spent on fuel would stay in the state, supporting local farmers, ethanol plants, and related businesses.

In my opinion, failure to grow the E85 markets will continue to stunt the growth of the U.S. ethanol industry. The ethanol industry has tried to grow their markets by increasing exports and lobbying for E15 in the fuel supply. Neither of those solutions, in my view, have the appeal or growth potential of developing a robust E85 transportation infrastructure in the Midwest.