The beginning of 2012 has seen significant changes in U.S. ethanol policy. The VEETC blending credit and a tax on ethanol imports both expired on December 31, 2011, and U.S. ethanol industry groups have shifted their political weight toward initiatives like E15 and advanced biofuels. Although these developments improve Brazil's access to the U.S. ethanol market in 2012, the reality is that the Brazilian cane industry may struggle to fully satisfy even its own domestic demand in 2012 owing to a sharp downturn in cane production and an uncertain outlook for output growth.

Brazil became the leading importer of ethanol from the U.S. in 2011, a situation many would have considered unthinkable only a few years ago.

This note examines the development and current situation of the U.S. and Brazilian ethanol industries and their perspectives for 2012 and beyond.

U.S. outlook
• Rabobank does not expect that the removal of the U.S. import tariff will have a large impact on U.S. ethanol production in the near term, first because it is likely that Brazilian ethanol prices will continue to be higher than U.S. prices, and second because the significant duty-free ethanol imports via the Caribbean did not noticeably impact U.S. corn ethanol production in years past.

• U.S. ethanol production above the 15 billion gallon mandate level will face volatile economics related to the spread between oil and corn prices. And, if corn prices increase sharply, U.S. lawmakers may scale back the mandate during periods of low corn stocks-to-use.


David C. Nelson, Global Strategist for Grains & Oilseeds with Rabobank’s Food & Agribusiness Research and Advisory group: “Despite the expiration of the tax credit and currently negative margins, we expect U.S.ethanol production to increase slightly in 2012 as an increase in mandated levels of production offsets what we expect to be a decline in exports.

"The outlook for exports is heavily dependent upon what happens with the sugar crop in Brazil, the U.S.’s biggest export competitor. Rabobank’s outlook for higher U.S. ethanol production is also predicated on regulatory approval for E15. If E15 is adopted by just 10 Midwest states, that will alleviate current blend wall restrictions.”

Brazilian outlook
• Regarding the forthcoming 2012/13 season in Brazil, it is far less clear that millers will maximize sugar production, as they have done for the preceding two seasons. Indeed, if world sugar prices continue to decline in2012, Brazilian millers may well react by increasing the share of cane that is milled for ethanol production.

• The most important short and medium term challenge for the Brazilian cane industry is bringing field productivity back to normal levels.

• Using 2011/12 output as a base, the Brazilian cane industry has scope to boost cane production and processing by close to 130 million tonnes in order to maximize utilization of current installed capacity, while brown field expansion in the coming years could add anywhere between 62 and 125 million additional tonnes of capacity.

Andy Duff, Head of Rabobank’s Food and Agribusiness Research and Advisory group Brazil: “Rabobank believes that the abolition of the US import tariff on ethanol represents a significant opportunity for the Brazilian cane sector in the medium to long term.

"However, in the next few years the focus of the Brazilian industry is likely to be keeping up with the growth of potential consumption in the domestic market, which will continue to rise as a result of expansion of the flex-fuel fleet.” PD

—Rabobank Food & Agribusiness Research and Advisory (FAR) group press release