Brazil's ethanol exports will remain sluggish in 2011 even if a U.S. import tariff on the fuel, which has long been criticized by Brazilian producers, expires by year-end, analysts and industry officials said.

A modest rise in cane crop output if any next season and high sugar prices will limit ethanol output, they said.

The extension of the tariff, along with a 45-cent a gallon excise tax credit for blenders, was included in a tax-cut legislation being negotiated in U.S. Congress. A test vote is scheduled for Monday in the Senate.

"Any substantial increase in output (in response to a change in the tariff) could be expected only from 2012 on," said Plinio Nastari, president of Datagro consultants.

Brazil's 2011/12 cane crop (April-March) is only expected to increase slightly or even fall from the current season, depending on weather. Below-average rains this year and a slow renewal of fields is expected to hurt yields. If confirmed, this drop would be the first one in 11 years for cane.

"If Brazil had an excess of cane it would be different," said Antonio de Padua Rodrigues, technical director at the cane industry association Unica, adding that the impact of ending the tariff would be "little or nearly none in the short term."

And with ICE raw sugar prices hovering around 30-year highs, mills are expected to prioritize the sweetener at the expense of ethanol. This would likely push up prices of the fuel locally, therefore reducing its competitiveness abroad.

In 2008, with low ethanol prices in the Brazilian market, exports to the United States reached about 3 billion liters -- including direct shipments and through processing plants in the Caribbean. This year, they should stand at 150 million liters.

Traders expect total ethanol shipments in 2011/12 to be roughly unchanged from this season, at around 1.5 billion liters. Brazil's output in 2010/11 will total about 28.4 billion liters, up from 25.8 billion liters in 2009/10.

"All indications are that ethanol stocks will only barely be enough to meet the internal demand next year," said Julio Maria Borges, director at Job Economia analysts.

SLIGHT INCENTIVE

Even with an expiration of the tariff, export deals would depend on supplies and prices in both markets as well as on Brazil's currency.

Anhydrous ethanol is currently traded in Brazil at $700 per cubic meter at the mill gate. The U.S. tariff plus logistic costs are estimated at $200 per cubic meter.

But an expiration of the tariff could spark a resumption of new mill projects that are now on hold, Datagro's Nastari said. Any increase in output resulting from these new mills however would take two years at least.

Currently, the main cane companies in Brazil are putting cash into buying smaller rivals rather than in building additional capacity.

Brazil used to be the world's largest ethanol producer for decades but was surpassed by the United States a few years ago. It is often the biggest exporter of the fuel.

"The end of the tariff would stimulate production not only in Brazil but also in other countries. And this could finally favor the surge of a real market for ethanol," said Luiz Carlos Correa Carvalho, director at Canaplan consultants.

source: reuters

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