Summary
1. Corn is used in 97 pct of Ethanol Production in the U.S.2 Corn Prices are at record high levels at around $6.00 per bushel3. Expected Planted acres are below what may be needed to provide corn for all uses during the next year.4. Sugar Ethanol is much cheaper to produce than is Corn Ethanol5. Brazil has surplus Sugar and surplus Ethanol capacity6. Ethanol Import tariffs may be in question with a new administration7. Imported Ethanol may help solve some of the Food verses Fuel debate.
Analysis
In a Dow Jones article titled "Brazilian Ethanol Makers Eye U.S. Market" the author points out that Brazil is on the cusp of a burdensome Sugar Production year. They have excess capacity for Ethanol Production Capacity available.
Wholesale prices for Ethanol Produced from Sugar in Brazil is about $1.64 per gallon. The current average price for U.S. produced Ethanol is around $2.55 per gallon. The article goes on to say that the export price for Brazilian Ethanol is about $2.18 considering the 54 cent U.S. import tariff. Add freight to the U.S. and one will know when Brazilian Ethanol will be available in large quantities for U.S. Consumers.
The expected planted acres of Corn here in the U.S. requires a record yield to satisfy current corn demand. Weather is always unpredictable so we do not know what will happen. What we do know is that Corn Prices along with other commodities, will continue to be very volatile. That will put some domestic ethanol plants at risk as margins are below replacement costs to build and run some plants.
The Sugar lobby is very strong here in the U.S. To get the border opened to world sugar would be very difficult. However, the answer may be to import sugar in the form of Ethanol.
If the current 54 cent import tariff were lifted, Brazilian Ethanol would come into the U.S. today. Some current politicians favor reducing the tariff to allow more imports. The theory being it is better to send money to Brazilian farmers that to the Middle-east. We will see.
If corn yields get threatened this summer and prices go above $7.00, the Brazilian Ethanol will likely work into the U.S. even with the current 54 cent tariff. World Price sugar prices are staying low because it can not get to U.S. Consumers. As long as that continues, Brazilian Ethanol will be available to U.S. consumers at a price below U.S. made Corn Ethanol.
The Bottom Line-- Corn prices are and will likely continue to be very volatile. Brazilian Sugar Ethanol is much cheaper to produce than is U.S. Corn Ethanol. Much more upward movement in Corn prices will encourage Brazilian Ethanol to move into the U.S.
Brian Stevenson consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
