Narrower Access Into Brazil

On top of the slowdown, the world’s No. 2 ethanol nation is holding strong on policies that check robust U.S. imports. In addition to its tariff rate quota, tough feedstock traceability requirements place another roadblock in front of U.S. ethanol.
By Matt Thompson | August 27, 2020

Like the U.S., Brazil has seen declining demand for fuel in the face of the COVID-19 pandemic. That, coupled with the country’s biofuels program, now makes getting U.S. ethanol into the country challenging, but still workable.

Brazil, with its established sugar cane ethanol industry, and burgeoning corn ethanol sector, hasn’t been immune from the impacts of COVID-19. In fact, the country is a nation hard-hit by the pandemic, with more than 3 million confirmed cases by early August, second only to the U.S. And the pandemic’s effect on ethanol demand—and production—in Brazil, as in the U.S., has been substantial: fewer people driving means fewer people buying gasoline and the ethanol blended with it. The pandemic, along with the country’s biofuels policy, RenovaBio, means getting ethanol into Brazil is a challenge. But it isn’t impossible, according to experts.

Gabriel Miranda, regulatory consultant for EcoEngineers, echoes the recent sentiment of Brazil’s Minister of Agriculture when describing the effects of the pandemic on Brazil’s ethanol industry as a “perfect storm.”

“The demand went downhill, and the prices of oil and gas just followed along,” he says. That drop in demand and prices triggered the country’s sugar mills to switch from ethanol production to sugar production “so they could keep up with their cash flow and their finances,” according to Miranda.
Leticia Phillips, North American representative of UNICA, the Brazilian Sugarcane Industry Association, agrees. “Since sugarcane is a plant that cannot be stored, there is no choice but to harvest and crush it, and the sector is working to identify alternatives such as increasing sugar production,” she says. She adds that since the beginning of the sugarcane harvest, Brazilian ethanol production has dropped by 5.88 percent. Ethanol consumption in the first half of 2020 was down 16.7 percent from the first half of 2019, she says.

Due to the strain the country’s biofuels industry is under, the government is looking to amend its carbon credit targets—called CBIOs—under RenovaBio. Miranda says there is a proposal to reduce the program’s CBIO requirement by half for this year. He says reducing those targets affects markets as buyers of the credits take a “wait and see” attitude, as it’s not yet clear what this year’s targets will be. “People just go to a more defensive position,” he says. “Until the time they actually come up with their new targets, I’m not expecting a very large amount of CBIO transactions.”

Phillips says that while the new targets have yet to be announced, UNICA recommended a goal of 16 million CBIOs for 2020 and 37 million the following year. “These numbers reassure the market, limit an oversupply of credits and put the program on sound footing to survive the pandemic,” she says, according to research conducted by the organization.

In addition to domestic effects, the pandemic has also played a role in Brazil’s imports and exports. “We believe there will be a temporary slowdown in the flow of ethanol commerce given the lack of demand caused by the pandemic,” Phillips says. “Brazil and United States have an important trade flow in biofuels, with Brazil exporting about 300 [million gallons] to the U.S. and importing about 400 [million gallons] from the US. We believe this flow will pick up again as isolation measures are being relaxed around the globe.”

Despite that slowdown, Brazil is still a major player in the global ethanol sector, and a major competitor with the U.S. for agricultural trade opportunities, says Kenneth Scott Zuckerberg, lead economist for grain, farm supply and ethanol at CoBank. He says the country’s growing production capacity, the low cost of sugarcane, and the value of the Brazilian Real versus the U.S. dollar make Brazil a major competitor on a global scale. Add to that the tensions between the U.S. and China, and Brazil is in an even better position.

While the Phase I trade agreement between the U.S. and China should, in theory, make the U.S. more competitive for exports to China, Zuckerberg says the reality may be different. He says the weak Brazilian Real, and the fact that China has been an inconsistent big buyer of U.S. ethanol indicate that exports to that country from the U.S. may not increase any time soon. “I think that’s a challenge we have, and we’re not factoring in any material uptick in Chinese ethanol purchases into our export forecast,” he says.

Qualified Opportunities
While it’s not clear what 2020’s targets will be, Miranda says there is still a market for U.S. ethanol in Brazil. Miranda says there is potentially a premium—a simulation puts it at 3 cents per gallon, depending on a producer’s carbon intensity score. “If you’re getting a 3-cent premium per gallon, that could be a significant amount of money and I don’t see why people wouldn’t be interested,” Miranda says.

But RenovaBio offers some challenges for ethanol importers, including the requirement that corn be traceable back to the farm that produced it. “There’s no way ethanol plants that buy their corn from grain elevators [can] trace the corn back to the farm where it came from. So that’s an operational barrier,” Miranda says.

Zuckerberg says while the traceability issue is currently perceived as a “roadblock” for U.S. producers, it also presents an opportunity. RenovaBio, he says, may prove to be a catalyst for American ethanol companies to embrace input tracing. “I think that’s a good thing from a business standpoint,” he says, adding that sustainability-oriented consumers have been seeking more information about where their products come from. Miranda agrees. “Intially, there was some concern because there might be some strategic information that they didn’t want to go public, but if that can be worked out, it is possible,” he says. He adds, there are “ongoing discussions” about how to amend the traceability aspect of the program to make it more beneficial for all players.

Brazil’s Tarif Rate Quota also serves to limit U.S. imports, Miranda says. The country allows 750 million liters (198 million gallons) of ethanol per year to be imported tariff-free—a threshold that was previously 600 million liters—but any ethanol beyond that faces a 20 percent tax. “American policy makers have lobbied Brazilian legislators to lift this quota, and this is an ongoing discussion,” he says. “I think that would definitely help, because if you just remove 20 percent taxes, that would facilitate more trade.”

Those challenges may be limiting participation in the program, Miranda says. “I think those are the main points that are preventing this from taking off. If they can better streamline the compliance requirements, more people will be willing to participate in the program.”

But, he says, the Brazilian government is excited about the program, and he thinks steps will be taken to make sure the program operates smoothly. “The Brazilian government’s really trying to push this agenda of making ethanol more of a commodity and being a world player in that sense,” he says, adding that China and India are both very interested in how the program works for Brazil, and how a similar program may be used to help in areas where air pollution is rampant.

And that focus on air quality is even more important now, Phillips says. “The decarbonization services offered by RenovaBio are as important as ever. We will eventually beat COVID-19, but tackling climate change is a greater long-term challenge,” she says.

Looking Forward
Phillips says the government has also offered some assistance to the Brazilian ethanol industry in the face of the COVID-19 pandemic. She says a line of credit is available to producers which is good for two years. “Most producers are still evaluating whether the conditions of this program will meet their individual needs,” she says.

While the future is uncertain for many industries, Phillips says Brazil’s ethanol industry is a resilient one. “We have met earlier challenges by reinventing ourselves,” she says. The pandemic, she adds, has forced producers to diversify and cut costs. She says products like non-fuel alcohol, hand sanitizer and biomethane, have helped producers manage the decline in ethanol demand. “The sale of non-fuel alcohol remains high with 50% growth in the first half of July, at 16.1 million gallons in the 2020-’21 harvest, against 10.7 million gallons in 2019-’20. From April 1 to July 15 of this year, the volume sold was 111.5 million gallons, an increase of nearly 66% over the same period of the last harvest,” she says.

Another factor that may help Brazil’s recovery, and the seasonality of sugarcane, is its growing corn ethanol sector. Brazil is a major producer of corn, with the USDA’s Foreign Agriculture Service projecting Brazil’s corn production to reach 114.5 million tons by 2029. Some of that corn is now being used for ethanol production. “Brazil’s aggressive biofuels strategy relies on sugarcane ethanol, corn, biodiesel and others,” Phillips says. “Corn ethanol production in Brazil is relatively small but growing. In the last harvest cycle, it was 423 million gallons (about 4.6% of total Brazilian production), but it will struggle, like the others, until the coronavirus is in the rearview mirror. Brazil’s hyper focus on biofuels will ensure that every [type of] ethanol is an important part of our nation’s biofuel approach going forward.”

Zuckerberg says growing Brazil’s corn ethanol industry is a smart move for that country’s agriculture economy. “To the extent that sugarcane has a seasonal dynamic, having another fuel crop that could also be used and processed into ethanol gives them additional production capabilities,” he says. “It certainly proves to their advantage as an ethanol producer.”

And much like the U.S., the country’s ethanol sector has played a role in combatting the coronavirus. “Our members have produced and donated 250 million gallons of alcohol for hand sanitizer and other uses to the public health system in nine Brazilian states, and provided countless donations of food and other essential items,” Phillips says.

Author: Matt Thompson
Associate Editor, Ethanol Producer Magazine
701.738.4922
mthompson@bbiinternational.com