US ethanol sector could ride out loss of tax perks

The US ethanol sector looks avoiding a 2009-style collapse if moves to scrap tax support succeed, with prices of the biofuel low enough to hold their own on the domestic market.

Ethanol prices are low enough to absorb the potential loss of a $0.45-a-gallon tax credit for blenders mixing the biofuel into forecourt gasoline without becoming uncompetitive, UK researchers said.

Even factoring out the tax perk, ethanol would only have stood at a premium to gasoline, during the last 18 months, for a few weeks in autumn last year.

"It would have been economical for fuel blenders to use ethanol," Charlotte Garbutt, at the Agriculture and Horticulture Development Board, said.

Coupled with a US floor, which rises to 15bn gallons by 2015, on ethanol which must be mixed into fuels, this discount "would point to strong US ethanol demand in the near-to-medium term even without a subsidy".

Brazil hamstrung

Nor would the removal of a $0.54-a-gallon tariff on ethanol imports also being considered by US lawmakers appear a threat to the domestic industry, for now, given the supply squeeze in the other major producer – Brazil.

"High sugar prices and ongoing growth in domestic usage means that Brazil is unlikely to be in a position to take advantage of any US tariff removal in the near future," Ms Garbutt said.

While Brazilian ethanol has historically cheaper to produce, being made from cane in a more efficient process, high sugar prices have diverted more of the crop to making the sweetener rather than the biofuel.

Indeed, Brazil, which has encouraged cane ethanol as a means of reducing reliance on fossil fuels, is mulling measures to lower the mix of the biofuel in forecourt gasoline to ease the squeeze.

Margins soar

Ms Garbutt's comments follow the passing by the US Senate of a vote to end ethanol perks by the end of this month, at a time when the country is struggling to balance its budgets, although the move has yet to be passed by Congress or the US president.

And they come amid a recovery in ethanol production margins earlier this month to $0.26 per litre, the highest since at least 2009, from a nadir of $0.16 per litre in June.

"The past few weeks have seen a large improvement in the margin," she said, with corn prices falling early in the month while ethanol prices have remained elevated.

Indeed, ethanol prices on Tuesday hit a three-year closing high of $2.911 a gallon in Chicago, for the spot August contract, taking gains this year to 22%.

Export consideration

However, one concern for the US ethanol sector could be a loss of competitiveness on export markets, with the subsidies attacked by many foreign producers as allowing America to compete unfairly in world trade.

"In the point of view of the industry, they have allowed the US to undercut prices from Europe's own producers in Europe," Ms Garbutt told Agrimoney.com.

Competition from foreign supplies was cited by the UK-based Ensus plant, Europe's biggest wheat ethanol producer, as a major reason for its decision to close down over the summer.

The closure appears at odds with a European Commission estimate that of expanding the region's bioethanol capacity, with the sector seen swallowing 26.4m tonnes of cereals by 2020-21, compared with 9.1m tonnes a decade before.

source: agrimoney