Running Low On Gas: The Competition For Ethanol Feedstocks
The global ethanol market has grown 400% in the last decade, driven by the United States and Brazil.
Rapid adoption of Flex Fuel Vehicles (FFVs) capable of using any mix of gasoline and ethanol has supported demand in Brazil. The mandated Renewable Fuel Standards (RFS) has similarly supported ethanol consumption in the United States. This summer’s drought conditions in the US have pushed up the price of corn, the primary feedstock for US ethanol production.
Brazil: arbitrage at the pump
- Flex Fuel Vehicles (FFVs), introduced to the Brazilian market in 2003, account for 85% of vehicle purchases and 50% of the total national fleet today
- FFVs drove a rise in consumption of hydrous ethanol from 5bn to 17bn litres a year over the period 2003 to 2010. This has since fallen to 12bn litres
- Brazil’s sugarcane sector has prioritized sugar production over ethanol, taking advantage of higher prices to rebuild stressed corporate balance sheets after the 2008 financial crisis
- Furthermore, Brazilian government efforts to control inflation and gasoline prices have politicized the fuel balance and have limited ethanol prices
- The 12/13 season is expected to deliver increased production and the global sugar market is returning to surplus, suggesting more cane is available for ethanol production
- However, domestic ethanol values remain at a 20% discount to sugar returns, partly because of the weak Real
Weather Stress in the US
- The Renewable Fuel Standards (RFS) have driven consumption of ethanol in the US. The first RFS was introduced in 2005 and mandated the use of 7.5bn gallons of ethanol in gasoline by 2012. However, this was met early and a second RFS was subsequently introduced, increasing the mandates, and demand was required to reach 9bn gallons in 2008, increasing to 36bn gallons in 2022
- In 2012, around 13bn gallons of ethanol is set to be blended with gasoline, the majority of which is derived from corn – enough to amount to around 10% of US gasoline supply
- A lack of rainfall and unrelenting heat during the mid-summer silking period has damaged the outlook for the 12/13 corn crop, and will also see larger-than-usual acreage being abandoned, whilst yield forecasts have been continually downgraded
- The US drought has pushed up corn prices, reaching $8 per bushel for delivery on the Sept. ’13 contract
- These record prices are unsurprisingly causing concern from the demand side of the market and the livestock, poultry and hog industries are calling for the RFS to be waived, though there is no precedent for this and it is also unlikely to impact demand given currently blending economics
- In theory, ethanol supplies from Brazil could be used to meet US demand, though that still depends upon the price differential between corn and sugar achieving an equilibrium level that is able to encourage a change in trade in the medium term
Henry Toller, Czarnikow analyst, said: “Demand for ethanol for blending into fuel has increased massively over the last decade. With the current pressures on supply being felt in the US, it has exposed an interesting change in trade dynamics.”
Peter de Klerk, Czarnikow analyst, said: “The increase in the Brazilian sugar crop in the current season, and a return in the international market to a surplus could see more cane turned to ethanol. Still, the 20% discount between ethanol values and sugar returns remains an important market factor.”
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