U.S. Ethanol Enters Global Market Place

2010 is shaping up to be a record year for U.S. ethanol exports—and that's just looking at the data through July.
By Holly Jessen | October 14, 2010
With ethanol exports booming in 2010, the question remains whether the year is an anomaly or the beginning of export expansion. In the first seven months of the year, 182.7 million gallons of U.S. ethanol was shipped to other countries. Only one year in the past two decades, 1995, has seen more ethanol--197.5 million gallons--exported than the amount exported so far this year. "We're expecting that we could export in excess of 300 million gallons this year," says Geoff Cooper, who tracks exports for the Renewable Fuels Association as its vice president of research and analysis.

Although the numbers are notably higher this year, the U.S. industry has been exporting its product for years, Cooper says. The difference this year is the saturation of the U.S. domestic market. "There's really nowhere else to go with ethanol in the U.S. markets, so the natural progression of things is to start developing foreign markets," he says.

Spring was a peak time for U.S. ethanol exports. A total of 48.3 million gallons was exported in March and 40.8 million gallons in April. "Things really boomed in March and April, both," he says. "Just in those two months alone we exported nearly 90 million gallons." The numbers were not as dramatic the next two months, dropping to less than 20 million gallons followed by a rebound in July, when 25.2 million gallons were exported.

Exports tracked by the Foreign Agricultural Service, Global Agricultural Trade System, include denatured and nondenatured, nonbeverage, ethanol traditionally used for industrial purposes, although it can be used for fuel. "Our industry is exporting product and there's international demand for ethanol," Cooper says, "whether it's for fuel, which most of it is, or whether it's for some other industrial purpose."
Through July, the U.S. had exported 121.7 million gallons of undenatured ethanol and 61 million gallons of denatured. Canada, Netherlands, United Arab Emirates (UAE), Brazil and Jamaica, listed from highest to lowest, were the top five importers of U.S. denatured ethanol while Netherlands, India, Mexico, South Korea and UAE were the top importers of undenatured ethanol.

Brazil is another notable importer of U.S. ethanol. The country imported a significant amount of U.S. ethanol in the early spring, dropped back down to virtually zero shipments in May and June, and then imported more in July. "We have historically been a net importer of Brazilian ethanol," Cooper says. "Today, things have reversed and we have actually exported substantially more ethanol to Brazil than we've actually imported this year."

UAE also presents an ironic story. The country is a substantial oil producer and a member of OPEC. "We think it's interesting that there are oil sheiks from UAE driving around with corn ethanol in their gas tanks," Cooper says.

Who's Exporting?
Big River Resources LLC is one example of an ethanol producer that plans to export product. Starting in September, the company dedicated its capacity at the Galva, Ill., plant to producing undenatured ethanol solely for export for the next 60 or 90 days, Jim Leiting, general manager, tells EPM. This is the company's first foray into ethanol exports and the goal is to capture an improved margin structure. "We identified an opportunity in the marketplace and our plant had the capacity to do this," he explains.

Big River Resources looked at the possibility of exporting ethanol for about three months before diving in, ultimately after holding sales for ethanol export. The company now has two buyers that are exporting its ethanol to Europe's main port at Rotterdam in Netherlands. Although the company currently plans to wrap up production of undenatured ethanol before the end of the year, Big River will extend that if, after review, it makes sense to continue, Leiting says.

Platinum Ethanol LLC, a 110 MMgy plant in Arthur, Iowa, is another plant with its eye on foreign markets. This plant has exported ethanol off and on this year although manager Nick Bowdish declined to say how much is being sold into the export market. "We've got the flexibility to go back and forth depending on what indicators are being shown in the marketplace," he says, adding that it takes a couple days to make the switch to undenatured ethanol. "All changes are made on the go," he says. "Then it's just a matter of segmenting different products in different tanks."

Both plants have distilled spirits permits (DSP) and both general managers say the process of transporting the product from the plant to where it's exported isn't much different from what is usually done. At Platinum Ethanol, the product is shipped out via rail, the same way it would be if it were going to be used domestically, Bowdish says.

Of course, the bulk of ethanol produced in the U.S. is still being used domestically. The Andersons Inc., which has three ethanol plants in Michigan, Indiana and Ohio, tells EPM it currently isn't exporting ethanol, although the company acknowledges that some of its ethanol may have found its way into other country through resellers. "We continue to explore opportunities as they arise, but our plants are not ideally situated for export execution," Mike Irmen, director of ethanol services, tells EPM. "Plants that are along the river system, set up to load 100-car unit trains or in locations that don't consume more ethanol than is produced locally are more likely to work into export channels." Another barrier for The Andersons is that the EU spec for ethanol is undenatured and less than 3 percent water content. "We could work around the water content issue, but it would command a premium to compensate us for the water removal and efficiency and yield loses," Irmen says.

The good news for the domestic ethanol industry is that it's becoming a sophisticated, global industry, Cooper tells EPM. "The U.S. ethanol industry truly is a global energy provider today, where as it hadn't really been one in the past," he says.

In another way, increased exports have been a mixed blessing, Cooper adds. U.S. producers are now exporting a homegrown, renewable fuel—and the benefits associated with that—to other countries. "One of the founding principles of the industry was, let's do what we can to increase our domestic fuel supply and reduce the amount of oil that we import," he says. "So here we are now in a situation where the U.S. ethanol industry is standing at the ready to produce more ethanol and to assist in reducing the amount of foreign oil that we need, and yet the industry is being held back because of the limit on E10." The situation underscores the need for immediate approval of E15, he adds.

Leiting also points to the delay in E15, as well as concerns as to how long it will take to introduce that fuel successfully into the marketplace. "We would prefer to have a good strong domestic market," he says.

It all adds up to producers being forced to export ethanol due to "regulatory red tape" that has delayed the approval of E15, Bowdish says. He'd like to see the U.S. EPA approve E15 as soon as possible, "so that all Americans can use more ethanol, more homegrown renewable fuel, in their gas tanks," he says.

Why the Spikes?
One place to look for the stimulus in export volumes is to the north, says Rob Esposito, the head of Latium Capital's ethanol and related products trading unit. Canada is importing U.S. ethanol due to higher wheat prices, a major ethanol feedstock there, and the 2010 Canadian ethanol mandate. "Although the Canadian government has a 5 percent renewable fuels standard, some of the provinces have higher mandates—Saskatchewan is at 7.5 percent, Manitoba is at 8.5 percent," he says.

An even bigger factor can be found to the south, with drought in Brazil leading to a smaller sugar cane crush. April through August, Brazil saw significantly lower-than-average rainfall, with conditions in some areas extreme, according to UNICA, the Brazilian sugarcane industry association. Additionally, Brazilian sugar exports are up nearly 11 percent from the same period for the 2009-'10 harvest. That contrasts with a nearly 50 percent decrease in ethanol produced for export at mills in south-central Brazil. By the end of the sugarcane harvest, UNICA expects that the south-central region will export 1.45 billion liters (383 million gallons), a drop from 2.76 billion liters exported in last year's harvest. "Total ethanol sales by mills in the south-central region from the beginning of the harvest to mid-August totaled 9.69 billion liters, of which 8.82 billion were destined for the domestic market," UNICA said.

Then there's that all-important price issue. In May, the RFA calculated that, taking into account transportation, tariffs and other factors, the retail price of Iowa ethanol was $2.701 and Sao Paulo, Brazil, ethanol was $2.818, more than an 11-cent difference. That means E10 made from U.S. ethanol would be about 8 cents cheaper than a gallon of gasoline without ethanol. Even if the tariff weren't in place, E10 made with imported Brazilian ethanol would be 6 cents more than E10 made with domestic ethanol. For most of the year, U.S. ethanol has been priced lower than gasoline. In the spring, the price spread was as high as 80 cents less for E100 than conventional gasoline.

Moving into late summer and fall, however, that price relationship has shifted. Looking at futures prices, Rick Kment, a Telvent DTN biofuels analyst, points out that ethanol traded for the lowest price of $1.46 a gallon on June 29, compared to $2.07 futures prices for gasoline on the same day. By close of market on Sept. 16, that had changed to a futures price of $2.07 for ethanol and $1.924 for gas. In that month and a half, ethanol futures prices went from a significant discount of 60 cents a gallon to a premium of 15 cents. "A lot of this has really been driven by the increased cost of production," he says, "although the strong export and domestic demand has helped to solidify and to sustain the higher price." Corn prices increased in late summer and early fall, meaning increased production costs for U.S. ethanol plants. Kment believes this will mean lower export numbers in September and October. "That has significantly increased overall ethanol prices and will more than likely significantly narrow the price difference between these markets," he says.

Kment suggested that the increased exports to Brazil could be more of a seasonal movement around Brazil's sugarcane harvest, rather than a trend toward exporting more U.S. ethanol to Brazil overall. He also pointed to Russia, where drought will reduce its wheat exports, which, in turn, will likely mean higher demand for corn. That will help support higher corn prices, with ethanol prices generally tracking corn. As U.S. ethanol loses its price competitiveness, countries such as Brazil may move back to exporting their product rather than importing U.S. ethanol. "It's a very convoluted system, where one action in one area might effect and impact a totally different market," he explains.

In addition, it's not known what impact raising the blend limit could have on the industry and pricing. Could it spur on another movement to overbuild capacity? Kment asks. Would consumers want and use E15 and would retailers offer it? "That really is challenging to put concrete, significant numbers on [whether] higher blending will, or will not, significantly impact price," he says. "There are a lot of what ifs."

Holly Jessen is associate editor of Ethanol Producer Magazine. Reach her at (701) 738-4946 or hjessen@bbiinternational.com.