The Brazilians Are Coming!! The Brazilians Are Coming!!

October 19, 2017 |

By Dave VanderGriend, CEO, ICM
Special to The Digest

The legend of Paul Revere was that in 1775 he rode through the towns of Massachusetts and warned of the impending attack by the British. He used lanterns that would reveal how they were advancing- one of by land, two if by sea. If Paul was still with us today and was watching what was happening with our friends in Brazil, he might be warning us with a slightly different message: one if by ethanol, two if by corn. And he would use both lanterns because they are coming after both markets

The recent effort by Brazil to impose import duties on U.S. ethanol has received considerable press coverage and should send a clear message that we need to develop long term reliable markets here at home so these kinds of whimsical trade actions do not tum us upside down.

What has not received much coverage, and what may turn out to be even more devastating is the potential for Brazil to become a major corn producer and enter the global market. The combination of closing out a current export market for U.S. ethanol, while possibly taking away other export markets with their own ethanol; and then rubbing salt in the wound by producing corn and encroaching on those markets as well, could leave us battered, bruised, and in a serious situation.

Brazil has been the sugar cane center of the universe and it was always assumed that the ethanol they produce would be from cane. But times are changing, and the realities of world markets have caused Brazil to re-assess their agriculture strategy and pivot to corn. Currently Brazil is producing more corn than they consume internally, and that corn is finding its way to the world market. It is being produced significantly cheaper than U.S. corn and we will soon find ourselves going head to head with them.

But it gets worse–the Brazilian ministry of agriculture has announced they plan to double current production. This would mean another 4 billion bushels on the world market over the next 8 years, or they produce more ethanol for export, possibly capturing markets we have been developing over the past few years. However this plays out, corn is the currency. They can produce at half our costs and at the moment the only edge we have is that our cost of transportation is significantly lower. So they can beat us on the price of corn and beat us on the price of ethanol. But it gets worse – wait, didn’t I say that already? Well, I’ll say it again because their current cost of approximately $2 per bushel to get corn to the coastal ports could be cut in half, or even more, if they develop rail from the inland growing areas. And they will – if the Brazilian government is serious about doubling corn production they know they need to get it to market, and as we know here in the U.S., rail is often the difference between being competitive or not.

We have had a love-hate relationship with Brazil for decades as it relates to ethanol. Well, maybe not so much love. And what is happening right now is beyond irony. All the years ethanol received a tax incentive, Brazilian ethanol received it as well, despite their protestations. It was a disingenuous argument they raised as they constantly fought the import duty of 54 cents. They moaned and groaned and complained about the lack of fair trade when the reality was they received the same tax incentive once their product was used.

It was in the truest sense of the word, a “wash”. The 54 cent duty was offset by the 54 cent excise tax exemption (51 cent VEETC in later years) all ethanol received. Like all ethanol it was built in to the price and everyone was on a level playing field.

What they have proposed now is purely protectionism for their indigenous product– it is meant to give them an advantage over US ethanol. And in a way that’s ok–it is certainly understandable. I would expect a swift reaction from Congress to this situation, effectively knocking Brazil out of our markets. It may have the perverse effect of helping us as we no longer have to deal with this nonsense that sugar cane ethanol is somehow superior to corn ethanol in its carbon footprint.

But the bigger issue is; regardless of whether we send some of our ethanol to Brazil or they send some of their ethanol here, there is a new player at the table in the world of corn and we’d better find some domestic uses for ours because we may not be able to beat them in the world market. This increase in production is certainly not limited to Brazil. It is happening everywhere! Places that never grew corn are taking advantage of advances in seed technology– Canada is going to be able to produce more corn in colder climates than ever before. They are even talking about a significant corn crop in Alaska through a combination of greenhouse breeding and seasonal transplanting.

So what do we do? No sane person could argue the critical importance of the ethanol industry to U.S. agriculture and corn. Despite the fact that we are essentially below the cost of production, without the ethanol markets we would be in a full blown farm crisis. We don’t need to look far to see what can pull us out of this stale demand – and it is ethanol.

Can you imagine 15 billion gallons of new demand over the next few years, and the 5 billion bushels of corn it would gobble up? In a global economy that is starch long and protein short, processing corn to remove the starch (2/3 of the corn) and market the protein (1/3 of the com) we can expand food production in many of the protein deficient developing countries, corn we do not have to export, and hold our breath that markets will remain intact. Corn that can be converted to ethanol, we can use here and also not be subject to an unsettled trade outlook. That is a realistic goal as we head towards 25, 30, and even 40 or 50% blends. Conventional vehicles using higher blends today can be the springboard to a next generation of internal combustion engines and hybrids that take advantage of ethanol’s superior properties of high octane and low carbon. Automakers, the Department of Energy, and energy experts across this country have recognized that Henry Ford was right — ethanol is a superior fuel and is the most pragmatic and practical way to reduce emissions and stimulate the economy.

The ethanol industry needs to unite in its call to create a truly free market. A market not held back by hopelessly out of date modeling and interpretation that drives bad policy. We have identified a series of regulatory relief measures that would make these higher blends a reality and it would unleash the continued productivity of the American farmer to increase yields so that we can fuel and feed the world. And finally the markets and opportunities that corn ethanol would create would open the door to cellulosic and other feedstocks that currently have no market demand because there is nowhere to put the ethanol.

Let’s grow our own corn, make our own ethanol, and use it right here at home. And if someone says the Brazilians are coming, we can say they ain’t coming here.

 

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Category: Thought Leadership

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