(Reuters) – For three decades, the U.S. government sought to protect American corn farmers and ethanol makers from a feared flood of Brazilian imports by imposing a tariff that had the South American country crying foul.
But as the contentious tax finally expires at year-end, American farmers’ fears of being swamped by sugar-based tropical biofuel seem unfounded. With Brazil’s ethanol industry struggling to meet booming local demand, it’s U.S. producers instead who are shipping millions of gallons to the south.
Three factors have converged to push Brazil’s ethanol distilleries to the limit. Sugarcane production fell this year for the first time in a decade, reducing supplies; global demand for sugar has remained strong; and domestic motor-fuel demand has surged, straining local gasoline and ethanol supply.
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Brazilian ethanol demand outstrips supply by nearly 25 percent, according to Reuters and industry data. It may take more than two years for new investment to correct the imbalance, delaying Brazil’s predicted emergence as a “biofuel Saudi Arabia“.
Brazil’s shortage is so acute that the world’s No. 2 ethanol producer is actually importing U.S. corn ethanol, helping the United States dethrone Brazil as the world’s largest exporter.
“The end of the tariff is a start, but I don’t see major changes in exports over the next three years,” said Antonio de Padua Rodrigues, technical director at Unica, Brazil’s main sugarcane producers’ association.
“We still need to sort out how to supply our own market,” Padua said.
That should come as a relief to U.S. farmers who have fought to protect their subsidized corn ethanol market from producers in Brazil, whose tropical sun and cheap land allow abundant production of sugarcane, a much more efficient biofuel feedstock than corn.
Even with new U.S. environmental rules giving a big boost to ethanol demand, domestic producers have little to fear from Brazil until 2014 at the earliest, industry representatives and analysts say.
The 54-cent-a-gallon U.S. tariff on imported ethanol expires December 31. Brazilian producers had hoped this development would help them meet a goal of more than doubling output by 2020.
But even if Brazilian resolves its supply shortfall, other factors will probably hinder a full-scale assault on the U.S. ethanol market. These include a lack of pipelines, tankers, port facilities and storage capacity in both countries, along with an undeveloped market for liquid ethanol futures contracts.
Work on a 6.5-billion-real ($3.5 billion), 1,300-kilometer (808 mile) ethanol pipeline linking producers with ports in Brazil began this year. Completion of the whole project is not expected until the end of 2015. By 2020, it should be moving 22 billion liters a year, an amount nearly equal to all current Brazilian output.