Even before the US Environmental Protection Agency signaled last week
that it planned to cut its biofuels mandate for 2014, US ethanol makers were
already bullish on the prospects of growing exports, banking on what looks to
be a record corn harvest.
But now that the cut -- and a significant one at that -- has been
formally proposed, the ethanol industry may have to scramble to find those
export markets to soak up what is sure to be a glut of domestically produced
And going forward, experts say the EPA's proposed 2014 Renewable Fuel
Standard puts the entire industry in limbo, if capped US demand leaves
producers with only exports to fuel growth.
"For this year, exports are definitely the pathway going forward," said
Benjamin Salisbury, a Washington-based analyst with FBR Capital Markets. "The
question for the marketplace is, what does it mean for plantings and yields in
The EPA last week proposed for the first time a significant reduction to
the RFS, calling for 15.21 billion gallons of biofuels -- including up to
13.01 billion gallons of corn-based ethanol -- to be blended with the US
gasoline and diesel pool in 2014.
The proposal, which must still undergo a public comment period and
subsequent review before being finalized, likely next spring, represents a cut
of some 1.34 billion gallons of biofuels from the 2013 rule, with the EPA
citing the inability of the US marketplace to absorb blends of greater than
Meanwhile, the ethanol industry has estimated that US production of
corn-based ethanol could top 14 billion gallons this year, on the backs of an
expected 14 billion bushel corn harvest and favorable margins for biofuels
US EXPORTS VOLATILE
Geoff Cooper, the Renewable Fuels association's vice president of
research and analysis, said the US ethanol industry is on pace to export about
600 million-650 million gallons this year, a drop from 739 million in 2012.
So, ethanol exports would have to increase significantly in 2014 to make
up for the US oversupply. Cooper noted, however, that the US exported a record
1.2 billion gallons in 2011.
"We believe there is, at a minimum, enough ongoing global demand to
support at least 700-750 million gallons of exports, which would be about half
of the lost RFS volume," he said in an email. "I believe the 2011 record
demonstrates there is room for growth beyond recent/current export volumes."
Canada has been the largest customer of US ethanol exports, accounting
for 55% this year, followed by the United Arab Emirates (8%), the Philippines
(7%) and Brazil (7%), according to the RFA.
Archer Daniels Midland CEO Pat Woertz said the potential to grow exports
is significant, given that US corn-based ethanol is the lowest-cost
transportation fuel in the world, about 80 cents/gal cheaper than RBOB.
"The opportunity is to grow [exports], particularly in countries like
Brazil, Canada, some to Europe," Woertz said in a recent conference hosted by
Morgan Stanley just before the EPA announced its proposed 2014 RFS. "There's
even some going to Asia and the Middle East.
"So, exports will grow because of economics, but they'll also grow from
additional outreach and marketing of US-based ethanol to some of the export
countries," he said.
Analysts, however, cautioned that exports are dependent on several
factors, many of which are out of the hands of producers: price
competitiveness against other ethanol exports, primarily sugar cane ethanol
from Brazil; government policies mandating biofuels use; and tariffs.
The EU, for example, began imposing this year an $83.03/mt tariff on
imports of US ethanol, which the industry has been fighting.
"My sense is that exports can to some extent make up the difference in
the short-term, but that's an awfully unreliable source of demand," said Ian
Berry, a Milwaukee-based biofuels analyst with Brock Associates, noting the
volatility in year-to-year exports.
BRAZIL PRESENTS COMPETITION
Brazilian sugar cane ethanol producers, for their part, said the proposed
RFS, if finalized, would make the global ethanol trade more fiercely
competitive, and they have also lobbied the EPA to raise the 2014 biofuels
The EPA has determined that Brazilian ethanol, due to its lower
life-cycle emissions, qualifies as an advanced biofuel, which has its own
mandate, while US corn-based ethanol does not. But in its proposed 2014 RFS,
the advanced biofuels mandate is cut by 550 million gallons from the 2013
rule, and many observers expect the bulk of the advanced biofuels pool to be
filled by US biodiesel.
That could leave Brazilian ethanol producers also looking to other
countries to take their product, putting them in competition with US corn
ethanol producers also seeking to export.
Brazil, the world's second largest producer of ethanol behind the US,
recently estimated that it will produce 7.02 billion gallons of ethanol this
year, with exports expected to reach almost 750 million gallons.
"The rule is obviously going to affect the flow of trade among countries
in the world that use ethanol for transport," said Leticia Phillips, the North
American representative for UNICA, the Brazilian sugar cane industry
association. "This is something EPA should have in mind before finalizing the
--Herman Wang, firstname.lastname@example.org
--Edited by Derek Sands, email@example.com