U.S. ethanol exports: New markets mean missed opportunities for domestic market

By | April 15, 2010
News release posted May 19, 2010

Washington - Ethanol exports have boomed in recent months, with shipments destined for dozens of energy-thirsty nations around the globe, including some in the Middle East. The United States has been a net importer of ethanol for the last decade, but the nation is quickly evolving into a net exporter. While this is welcomed news to an industry looking for new markets, it serves to undermine the fundamental value of America's ethanol industry as a domestic replacement for imported oil. A new analysis from the Renewable Fuels Association (RFA) seeks to put this recent trend into context.

"The fact that U.S. ethanol exports are surging as domestic markets become saturated demonstrates that America's ethanol industry can and will compete globally. The question becomes: Do we want to export our biofuels and the benefits they provide, or do we want to use them here at home to help secure our energy future? Given the opportunity, today's industry can do both," said RFA Vice President of Research Geoff Cooper. "Unfortunately, current regulations restrict the amount of ethanol that can be used domestically. Therefore, the industry is being forced to look to the export market for additional growth opportunities."

The Raw Numbers

Data from the U.S. Department of Agriculture, Department of Commerce, and the Census Bureau indicate significantly increased U.S. ethanol exports in 2010. In March 2010, the U.S. exported more than 45 million gallons of ethanol. For the First Quarter of 2010, U.S. exports exceeded 83 million gallons. By country, Canada and the Netherlands lead the way. Interestingly, U.S. ethanol is also finding its way into Brazil and even OPEC nations in Middle East.

The Reason for Higher Exports

One reason for America's surge as a global ethanol trader is its current advantage as the world's low cost producer. Despite the Brazilian ethanol industry's recent attempts to portray its product as always being the cheapest in the world, current prices show Iowa ethanol plant-gate ethanol prices are 50 cents per gallon lower than Brazilian ethanol prices. As recently as February, that spread exceeded $1 per gallon. By way of example, a gallon of ethanol containing 10 percent ethanol from the U.S. would cost $0.11 less than a similar gallon blended with 10 percent Brazilian product.

The second reason for the surge in U.S. exports is the saturated domestic market for ethanol. Ethanol use in the U.S. is arbitrarily capped at 10 percent per gallon of gasoline (E10). Based on historic gasoline demand trends, this arbitrary 10 percent cap, called the "Blend Wall," would be around 12.5-13.5 billion gallons of ethanol. The U.S. industry has the capacity to produce 13.5 billion gallons annually, with more capacity waiting in the wings.

What is the Significance of Increased U.S. Exports?

Limiting domestic ethanol use only deprives Americans from the economic and energy security benefits of a homegrown fuel. The increase in exports demonstrates the world has a thirst for the cost-effective production of American ethanol.

As the RFA report notes, "As long as domestic ethanol usage is restricted by the regulatory limitation on 10 percent blends, the U.S. ethanol industry will be forced to look to the global marketplace for new demand sources. And, as a result, Americans will miss out on the opportunity for greater fuel savings and a healthier, more secure domestic energy supply."

What is the Impact Globally?

The RFA analysis also tackles the charges that U.S. and other nations' tax and trade policies are a barrier to trade. "The recent surge in U.S. ethanol exports demonstrates that a true global marketplace for ethanol is emerging and that supply, demand and price always win out," the report stated. "As current dynamics indicate, as long as individual nations' biofuels policies remain consistent and predictable, the global market will react accordingly and product will be traded efficiently. What truly disrupts global trade is unpredictable ethanol tax and trade policies that are irregularly adjusted based solely on the current economic health of the domestic industry. Brazil's erratic raising and lowering of both its ethanol blending requirements and import tariffs based on the domestic situation introduces a layer of complexity and volatility to the global trade of ethanol."

The full RFA report, "The Paradox of Rising U.S. Ethanol Exports: Increased Market Opportunities at the Expense of Enhanced National Energy Security?" is available at the RFA website.