Central American Getaway

Central American and Caribbean countries continue to serve as rendezvous points for Brazilian ethanol companies seeking to dehydrate their way out of the 54 cent U.S. import tariff. The loophole that allows this has a bad rap among U.S. producers, but is it deserved?
By Kris Bevill | September 15, 2009
In the tiny deep-water port community of Puerto Castilla on the northeastern Caribbean Sea coast of Honduras, plans are being finalized to build and operate the country's first ethanol dehydration facility. The location, chosen because of its access to the deep waters of the Caribbean Sea and direct route to U.S. ports, is surrounded by agricultural land ripe for sugarcane production and a country that holds the unfortunate rank of being the second poorest nation in Central America. Add to this the Caribbean Basin Initiative and the Central American Free Trade Agreement and the combination appears to be an almost irresistible ethanol export opportunity.

That's what Dan Christensen determined when he began exploring the Caribbean for ethanol opportunities several years ago. The former Green Plains Renewable Energy executive has many years of U.S. ethanol production experience, and when he discovered the facility in Puerto Castilla he knew it was the right place. In 2007, he formed Caribbean Bio-Energy Inc. and has since negotiated a 15-acre plant site with the intent of building and operating a 110 MMgy dehydration facility. The facility will import hydrous ethanol from Brazil, dehydrate it and export the finished product to the United States and other destinations. The entire facility, including the initial shipment of Brazilian ethanol, can be completed for just $30 million — one-quarter the cost of building a similar-sized U.S. production facility.

Not surprisingly, cost was a driving factor in Christensen's decision to enter the Caribbean market. Also influential to Christensen's decision were two pieces of U.S. legislation — the Caribbean Basin Initiative and the Central American Free Trade Agreement.

The CBI has been an issue of contention between U.S. ethanol producers and diplomats since its passage in 1989. U.S. producers argue that it provides Brazilian ethanol suppliers a loophole to avoid paying the 54 cent per gallon U.S. ethanol tariff and that it threatens the domestic industry's production cushion. Diplomats and other proponents of the CBI counter that the initiative provides impoverished nations a chance to boost their local economies and that the amount of tariff-free ethanol finding its way into the U.S. is not enough to make a dent in domestic production.

In addition, CAFTA signed into law by President George W. Bush in 2005, carved out country-specific shares of CBI ethanol for the Dominican Republic, Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua in the hopes of stimulating economic development in those countries.

The CBI limits the total amount of ethanol allowed to be imported to the United States to just 7 percent of the previous year's entire domestic consumption. To date, the six CAFTA nations combined with Jamaica and Trinidad and Tobago (the leaders in dehydration/duty-free ethanol importing), have not come even remotely close to meeting this cap, which could validate the argument that the initiative serves as no threat to the U.S. ethanol industry. However, CAFTA is just beginning to be put to use in participating Central American countries, and the amounts allowed to be imported into the U.S. are increasing every year.

CAFTA by the Numbers
According to U.S. Central Intelligence Agency data, El Salvador was the first country to ratify CAFTA and did so in 2006. Notable exports of ethanol to the U.S. had been made from El Salvador prior to CAFTA's passage, but ethanol exports doubled between 2005 to 2006, according to U.S. International Trade Commission statistics. And those numbers doubled again — from 44.5 million gallons to nearly 75 million gallons — between 2006 and 2007. The upward trend is expected to continue as more investors enter the market.

Costa Rica, which exported just over 37.5 million gallons of ethanol to the U.S. in 2008, didn't enact CAFTA until the beginning of this year. ITC statistics show just 749,100 gallons of ethanol were imported to the U.S. from Costa Rica between January and May 2009, which can be attributed to the global slowdown and reduced demand, according to the CIA.

Guatemala boasts sugar as one of its three main exports and has benefited greatly by increased sugar demands for ethanol production. The CIA credits CAFTA, which was put into effect in Guatemala in 2006, for greatly increased export investments. However, security concerns, lack of skilled workers and poor infrastructure have hampered extensive foreign interest and could be the reason why dehydration facilities have yet to be located in that country.

The Dominican Republic became an official participant of CAFTA in 2007 and Nicaragua and Honduras have been CAFTA participants since 2006, but none of these countries have made their entrance onto the U.S. ITC's ethanol export radar. It is expected that this scenario could soon change, as investors begin to realize the export opportunities made available by CAFTA.

The financial benefits offered to businesses via CAFTA are not lost on Christensen, who sees Honduras as an opportunity to have the best of both worlds - the dehydration/export market and the local production/distribution market. "Initially we liked [Honduras] because of the low cost of production," he says. "Now, as we've continued to be involved with it for a number of years, we're seeing that there's a whole new market in the need for biofuels. Honduras just passed a new biofuels law and is offering some fairly substantial tax incentives to provide ethanol to that marketplace." In fact, many countries in the region have proposed or recently-passed ethanol mandates, and Christensen points out that most of the countries do not have well-developed ethanol industries or import tariffs on the fuel.

The Final Destination
Mike Warren, executive director of global research and strategic services at Florida-based Hart Energy Consulting, is working with Caribbean Bio-Energy to complete its Honduran dehydration facility project. He says an E10 mandate in Honduras will mean an initial 7.5 million gallon market for ethanol—not much compared to the 9 billion gallons used in the U.S. in 2008. Which explains why dehydration will dominate Christensen's inital plan and why he expects to export up to 85 percent of his ethanol to U.S. ports.

According to Christensen, he will be able to dehydrate ethanol at his Honduran facility for approximately 18 cents per gallon and export ethanol to the U.S. for a total cost of $1.90 per gallon. Because his facility will sit near the docks of the deepest Caribbean Sea port in Honduras and will have storage tanks capable of holding more than 12 million gallons of ethanol, he believes he will have a competitive advantage over other Central American dehydration operations. If he were to locate on the opposite coast — the Pacific Ocean side — he would have to send loads through the Panama Canal, which means he wouldn't be able to use large ships and he'd have a longer haul to get to U.S. ports. His direct route to ports on the Gulf Coast and East Coast may even hold an advantage over some U.S. producers.
Christensen says the cost of shipping ethanol from Midwest production facilities to the Southeast can, in some cases, cost the blender more than it would to import it from the Caribbean.

Unlike U.S. corn ethanol producers, Christensen doesn't have many variables to consider when determining his operating costs. "It costs approximately the same amount to ship it from Brazil to Honduras and from Honduras to the Gulf Coast and East Coast markets in the U.S.," he says. "The only variables are the price to acquire it and the price to sell it."

U.S. producers may be uncomfortable with dehydration facilities in Central America and the Caribbean, but Christensen doesn't see any reason for imported ethanol to impact domestic production. "In fact, there may be a benefit in satisfying demand and some of the quotas that have been imposed by the government," he explains. "We believe that [increasing renewable fuel standard mandates] will be part of the incentive for us to send ethanol to the U.S."

"You have to look at it as a safety valve," Warren says. "What happens if there is a drought here in the United States? At least you can get some ethanol into the country duty-free, and that is a very good thing." He says the fact that the 7 percent cap on CBI imports has never been met proves there is no need for U.S. producers to feel threatened. Warren also points out that imported ethanol can serve an important role in filling the supply gap while cellulosic ethanol is being developed in the U.S. on a commercial-scale.

One thing U.S. producers and dehydration facility operators can wholeheartedly agree on is that the 54 cent ethanol import tariff should remain in place. For Christensen, the tariff provides a window of opportunity for him to get his product into the U.S. Opening up imports directly from Brazil would impact his business negatively and he would like it to stay in place at least until he enacts the ethanol production phase of his project. U.S. ethanol producers want to avoid a flood of Brazilian ethanol from entering and possibly pricing them out of the market.

Sen. Charles Grassley (R-Iowa) has been a staunch advocate for the U.S. ethanol industry and for retaining the ethanol import tariff, but he recently made several larger points about the tariff's impact on Caribbean nations and CAFTA. "Caribbean countries have developed an ethanol dehydration industry because of the existing carve-out, creating employment and wealth in the region," he stated. "The Jamaican ambassador to the United States says a mere lowering of the U.S. ethanol tariff would be a ‘doomsday scenario.' The U.S. ethanol tariff is another way to promote economic development among the vulnerable economies of our neighbors in the Caribbean."

It is clear that the debate surrounding CAFTA and the CBI, as well as the ethanol import tariff, is far from concluded. Ethanol imports are increasingly difficult to track as more countries begin to test the market and the true economic effects of CAFTA are yet to be known. CBI imports continue to increase and, as the domestic ethanol market grows to accommodate increased mandates, imports could exceed the quota within the next few years. EP

Kris Bevill is the editor of Ethanol Producer Magazine. Reach her at (701) 373-8044 or kbevill@bbiinternational.com.