Overview of the Global Ethanol Markets

Table of Contents

SUBSIDIES AND TARIFFS EXPIRING IN DECEMBER AND POSSIBLE EFFECTS ON THE UNITED STATES ECONOMY. 2

THE TOP CONSUMERS AND PRODUCERS OF ETHANOL 6

ETHANOL END-USE IN MAJOR CONSUMER COUNTRIES 8

INVESTMENTS IN ETHANOL INFRASTRUCTURE IN THE US AND BRAZIL 9

Subsidies and Tariffs expiring in December and possible effects on the United States economy.

Volumetric Ethanol Excise Tax Credit (VEETC)•    Administered by: Internal Revenue Service•    Scheduled termination: December 31, 2011 •    Description: Gasoline suppliers who blend ethanol with gasoline are eligible for a tax credit of 45 cents per gallon of ethanol.•    Qualified applicant: Blenders of gasohol (i.e., gasoline suppliers and marketers)

U.S. Customs and Border Protection (CBP)— Import Duty for Fuel Ethanol•    Scheduled termination: December 31, 2011•    Description: A 2.5% ad valorem tariff and a most-favored-nation duty of $0.54 per gallon of ethanol (for fuel use) applies to imports into the United States from most countries; most ethanol from Caribbean Basin Initiative (CBI) countries may be imported duty-free.•    Covered Entities: Fuel ethanol importers

These two measures were placed together since they are the two key laws in place right now that prop up the American ethanol industry and their dual cessation at the end of December will be the “one-two” hit combo set to strike this sector of the US economy.

To begin with, there is the question of employment in the Ethanol Industry. A report written by Cardno Entrix, an environmental consultancy firm, for the Renewable Fuels Association estimated that job losses that the United States would total 112’000, over a fourth of which would happen in the state of Iowa:

The same company, in a separate presentation done in 2010, outlined expected negative effects that the end of the VEETC would have on the US economy:

Reducing ethanol production 38% represents the loss of 4 billion gallons of output Industry would spend $6.6 billion less on purchases of grain and other raw materials, good and

services Reduce aggregate GDP by $16.9 billion (2009 dollars) Result in the loss of more than 112,000 jobs in all sectors of the economy Reduce household income by $4.2 billion (2009 dollars) Force consumers to spend as much as $5.5 billion more for gasoline annually Cut State and local tax revenue by $2.7 billion and Federal tax revenue by $2.4 billion

However, some contra-indications should be noted in relation to the above-mentioned adverse industrial effects. To begin with, loss in Federal tax revenue will be more than offset by the loss of the subsidies the government spends yearly on the ethanol incentives. Under the VEETC, the 14 billion gallons of ethanol used in E10 cost approximately $6.3 billion a year, while the subsidy for the 120 million gallons in E85 cost about $54 million a year.

Furthermore, the American Ethanol industry will still have ample market opportunities, since the ethanol-fuel demand in the United States will continue to grow. This is not only likely, but required by law: The Renewable Fuels Standard (in force since the Energy Policy Act of 2005 and expanded with the 2007 Energy

Independence Security Act) mandates that the United States will use up to 15 million gallons of primary ethanol (corn ethanol) as soon as 2015 and a total of 36 million gallons of renewable fuels by 2022. The US will, thus, still need to increase its ethanol use, but seeing as how the RFS does not mandate the source, options of supply outside of corn ethanol will be available.

RFS Mandate on Alternative Fuels (millions of gallons)

The production of corn ethanol, thus, faces two opposing factors pulling it in opposite directions. On the one hand, the loss of the VEETC (along with the SEPTC; see ahead) and the import tariffs removes a vital protection that propped up much of the American ethanol industry. On the other hand, existing ethanol infrastructure (refineries and low/high ethanol blend pumps) and demand, as well as the legal requirement to increase biofuels production and dependency creates a sizeable American market that cannot be ignored.

Indeed, the American ethanol market is already coveted by foreign exporters. The two sources for imported ethanol to the United States are Brazil, king of sugar ethanol, and the countries of the Carribbean Basin Initiative.

Initially launched in 1983, through the Caribbean Basin Economic Recovery Act (CBERA), and substantially expanded in 2000 through the U.S.-Caribbean Basin Trade Partnership Act (CBTPA), the CBI currently provides beneficiary countries with duty-free access to the U.S. market for most goods. The United States imports its ethanol from two main sources, Brazil and the Caribbean Basin initiative countries. For most of its import history, the CBI countries were the principal source of foreign ethanol for the US; Brazil surpassed the CBI in the years 2003 and 2005.However, import figures from the CBI are apt to be skewed, since “ethanol imports” from there can also be applied to ethanol produced in those countries from another country’s sugar cane (or other source), or ethanol produced in another country and in some way further refined in a CBI nation. Indeed, the only two significant producers of ethanol in the CBI are Jamaica (with 6.9 thousand barrels  a day in 2009) and Trinidad and Tobago (with 4.26 thousand bbl/day and 2.8 thousand bbl/day produced in 2008/2009 respectively).

The American corn-ethanol production industry, thus, will not completely collapse, but faced with constraints from the loss of subsidies, competition for corn-use by the food/livestock industries and increased competition from foreign imports, collapses in smaller (defined by < 60 million gallons/year) and/or less profitable ethanol producers should be expected, as larger ethanol refineries and distribution companies eke out a profit due to the sheer factor of capital-gains. The exact loss of production will be dependent on factors difficult to accurately predict, but based on Entrix forecasts and the percentage production based on small plants (see below table), a estimation of a loss of one third of production seems feasible. Based on the 2010 production of 13.230 billion gallons, this represents a loss of 4.406 billion gallons/year.

Small Ethanol Producer Credit (SEPTC)•    Scheduled termination: December 31, 2011•    Description: The small ethanol producer credit is valued at 10 cents per gallon of ethanol produced. The credit may be claimed on the first 15 million gallons of ethanol produced by a small producer in a given year.•    Qualified applicant: Any ethanol producer with production capacity below 60 million gallons per year

This measure is additional to the afor-mentioned VEETC. The small producer, thus, has an additional 10 cents of returned credit for the first 15 million gallons of ethanol made: an extra total of 1.5 million dollars on top of the 45 cent tax return

that the VEETC grants. Being that a larger ethanol distilling plant would have larger capital gain due to economies of scale, this extra incentive, on top of the VEETC credit, would be crucial to the survivability of many small-scale production facilities.

To illustrate which areas of the United States could face potentially fatal loss of competitively in the industry, the following table shows a run-down of ethanol production by state, with those labeled in red showing an estimation of states with a large amount of small-scale ethanol plants and those highlighted in black showing states with a total capacity of production inferior to 60 million gallons per year, in other words, states that only have small scale ethanol plants.

Ethanol Facilities, Nameplate Capacity Ranked by State(Largest to Smallest Capacity as of August 2011)

Rank State Nameplate Capacity(Million GallonsPer Year)

1 Iowa 3,579.0

2 Nebraska 1,989.0

3 Illinois 1,231.0

4 Minnesota 1,147.1

5 South Dakota 1,016.0

6 Indiana 948.0

7 Ohio 538.0

8 Wisconsin 504.0

9 Kansas 491.5

10 North Dakota 398.0

11 Texas 355.0

12 Michigan 268.0

13 California 254.5

14 Missouri 251.0

15 Tennessee 225.0

16 New York 164.0

17 Oregon 149.0

18 Colorado 125.0

19 Pennsylvania 110.0

20 Georgia 100.4

21 Virginia 65.0

22 Arizona 55.0

23 Idaho 54.0

23 Mississippi 54.0

24 Kentucky 35.4

25 New Mexico 30.0

26 Wyoming 11.5

27 Louisiana 1.5

United States Total 14,744.9

Alternative Fuel Station Credit•    Scheduled termination: December 31, 2011•    Description: A taxpayer may take a 30% credit for the installation of alternative fuel infrastructure, up to $30,000, including E85 (85% ethanol and 15% gasoline) infrastructure. Residential installations qualify for a $1,000 credit (biofuels pumps are not generally installed in residential applications)•    Qualified applicant: Individual or business that installs alternative fuel infrastructure.

This measure attends, primarily, to the construction of ethanol fuel stations in the US and in this case only to fuel pumps that provide a superior blend to E25 (a mixture of 25% ethanol, that requires a modified car structure). In general, although not strictly technically, this law refers to E85 fuel pumps. The loss of this law after December 31st will not affect ethanol fuel stations that are already built, but will make it difficult for new stations to be constructed; the lack of widespread ethanol fueling facilities, including and especially E85 fuel pumps, is one of the reasons ethanol consumption in the United States is hampered from further expanding.

All of this does not take into consideration advances in cellulosic ethanol technology. Both the US and Brazil, leaders in the Ethanol market, are spearheading studies into making cellulosic ethanol commercially viable and have been, rhetorically, on the cusp of the breakthrough for some years now. If the threshold is ever breached, then it will be possible to commercially produce ethanol out of cellulosic material, essentially most plant matter. The impact to the ethanol markets, (or indeed, the energy markets) are not the subject of this research, but will be substantial.

The top consumers and producers of ethanol

The previous tables, showing all countries who’s production and consumption of ethanol is superior to 1000 bbl/day, demonstrates that the two largest contributors to the world ethanol market are the United States foremost and Brazil in second. Europe, trailing at third place, produces its ethanol from a variety of non-sugar cane crops, such as corn, rapeseed, sugar beet and sunflower, something that affects overall productivity in the region.

Ethanol End-Use in Major Consumer Countries

Ethanol is used primarily for fuel in vehicle transportation, either mixing it with gasoline in various blends (E10, E20, E85, etc.). Few other end uses are noteworthy. Using ethanol in small-scale thermal energy reactors or for research purposes (such as the ongoing attempts to cheaply produce plastics out of ethanol) are some such uses. Brazil is a typical example of end ethanol use: over 96% of the country’s consumed ethanol is used in fuel transport.

Investments in Ethanol Infrastructure in the US and Brazil

The United StatesThere was much talk between the companies POET LLC and Magellan Midstream Partners LP to build the longest ethanol-specific pipeline in existence, that would span 1’800 miles from the US corn-belt to the North Eastern distribution terminals. However, this ambitious $ 3.5 billion project has yet to be initiated and the economic feasibility of such a pipeline is in question, seeing as there is a cap to the amount of ethanol US automobiles can consume since there are few that can handle blends higher then E15 on top of the general profit margin feasibility of ethanol as a fuel. As of yet, therefore, there are not Ethanol-specific pipelines in the USA.

According to the Renewable Fuels Association, the US has also set to build few new refineries of ethanol, some of which operate on different sources such as wood biomass or cheese whey. Note that most of these new refineries are small in port, most being under 60 million gallons per year in production capacity:

Map of Ethanol Refineries in the US. Green nodes are existing refineries and yellow nodes are refineries under construction.

Company Location Feedstock Projected Capacity (mg/y)Abenoga Bioenergy Corp. Hugoton, KS Crop Residue and

Celluosic Crops 25

Ag Energy Resources Inc. Benton, IL Corn 5

Cargill Inc. Ft. Dodge, IA Corn 115Clean Burn Fuels LLC Raeford, NC Corn 60

Dubway Biofuels Greenwood, WI Cheese Whey 3

E Caruso (Goodland Energy Center) Goodland, KS Corn 20

Range Fuels Soperton, GA Woody Biomass 10

Brazil

Meanwhile, Brazil is investing heavily in its ethanol infrastructure and capacity. Already Brazil has a superior number of ethanol producing plants throughout the country in comparison to the USA ( In 2010: 430 distilleries and mixed sugar/ethanol production facilities, compared to 170 in the USA) , mostly focused in its South-Eastern –and to a lesser extent North-Eastern – regions. In addition to this number, Brazil plans to increase this number. By 2013, an extra 105 plants are expected to come under operation and by 2018, an extra 2018 is projected to be functional. Projected capacity for the year 2018 is at over 12’151’914 liters, compared to the over 6’868’473 liters1 that 2009 saw:

1 Note: figures converted from round (46 million / 26 million, respectively) liter estimates

As well as a robust refinery plan, Brazil is also hoping to construct a sizeable ethanol pipeline network linking the states of Goiás and Mato Grosso, in the interior of Brazil, to the refineries centered in São Paulo state. While part of the pipeline might be operational as of 2012, the full extent of the project will come into action only in mid 2014, when it will have a capacity of transporting 5.5 billion gallons of ethanol a year and displace the roughly 1’500 tanker trucks that currently transport the fuel between these regions.

Sources

Clock Ticking Down on U.S. Ethanol Subsidies

Published: October 11, 2010

http://www.nytimes.com/2010/10/12/business/energy-environment/12iht-renbrazil.html

PARIS — A framework of tariffs and subsidies introduced by the U.S. Energy Tax Act of 1978 has long bolstered the American ethanol industry, helping to increase demand while keeping foreign competitors out.Green

But these tariffs are due to expire Dec. 31 and other countries are lobbying hard to get into the U.S. market — particularly Brazil, the world’s largest producer of sugar cane ethanol, which stands to be the biggest beneficiary if the tariffs are allowed to end.

Unica, a Brazilian trade body whose members are responsible for about 50 percent of the ethanol produced in the country, has been campaigning heavily, including a video, “All I Need to Know About U.S. Ethanol Subsidies,” which says that ethanol policies have cost American taxpayers $6 billion a year and have consumed $45 billion since 1980.

“We just want to see all biofuel products treated equally,” Emmanuel Desplechin, the associations’s European representative, based in Brussels, said in an interview. “Discriminatory trade policies should be removed if the U.S. and Europe are serious about weaning themselves off fossil fuels.”

The ethanol industry supports about 400,000 jobs in the United States — a number that the Renewable Fuels Association, a U.S. industry group, said could be cut by as much as 30 percent if the tariffs are not extended.

Ethanol makers say the fuel is 60 percent cleaner than conventional gasoline. Using a blend of gasoline and ethanol to power cars is seen by many as the most realistic way of cutting the 378 million gallons, or 1.4 billion liters, of gasoline consumed daily in the United States.

But ethanol, particularly from corn, the primary source of American ethanol, remains controversial. Billed by some as an answer to questions posed by climate change and fuel security, it is criticized by others as siphoning food away from the hungry and into the fuel tanks of rich countries, leaving a trail of environmental devastation in its wake.

As oil prices rise, ethanol becomes more competitive. As a rule of thumb, Mr. Desplechin said, when oil reaches $40 a barrel, ethanol is profitable — and oil is trading at about twice that level, about $83 a barrel.

U.S. ethanol refiners have produced record volumes this year, according to the U.S. Department of Agriculture, raising U.S. corn demand and depleting stocks of the crop — illustrating how energy policy has become an important factor in global grain markets in recent years.

Food prices are no longer at the record levels of 2008, but they remain high and are still prone to sudden upward spikes.

And though a study published by the World Bank suggested that the part played by biofuels in the rise of food prices in 2006-8 may have been overplayed, concerns persist over diverting agricultural resources to fuel production.

There is broad consensus that ethanol from sugar cane, which is fermented and distilled from the crushed cane waste after the sugar has been extracted, does not have the same impact on food production as ethanol from corn, since producers do not have to choose between producing food or fuel. And it is one of the most environmentally friendly of the first-generation biofuels, in terms of its carbon dioxide emissions, in production and use.

Mr. Desplechin added that sugar cane was not to blame for deforestation. Sugar cane for ethanol occupies 1.5 percent of Brazil’s arable land, while the area for livestock pasture represents almost 50 percent.

Sugar cane-based ethanol has been produced in Brazil since the 1970s, when, after an oil crisis, the Brazilian government introduced a subsidy to encourage carmakers to start producing large numbers of ethanol-powered cars, fostering the creation of a nationwide distribution network.

The industry has developed more strongly since 2003 with the introduction of “flex-fuel” engines that can run on ethanol, gasoline — which in Brazil is 25 percent ethanol — or any blend of the two.

There are about 10 million flex-fuel cars on Brazilian roads, and they account for about 90 percent of new car sales. Ethanol meets about half of Brazil’s fuel needs. “In Brazil, gasoline is the alternative fuel for cars,” said Mr. Desplechin.

Over all, a sixth of the country’s total energy needs are met by sugar cane. According to Unica, this shift has reduced carbon emissions by more than 600 million tons since the mid-1970s.

“Brazil is not a special case,” said Mr. Desplechin. “Other countries could use the same model to expand their use of alternative and greener energy.”

The United States has committed to raising its renewable fuel consumption to 36 billion gallons a year by 2020, or about 7 percent of its total consumption, while the European Union has called for 10 percent of European transportation fuel demands to be met by renewable sources by 2020.

Meanwhile, the U.S. subsidies and import tariffs, put in place by the Energy Tax Act enacted by President Jimmy Carter, award a tax credit of 45 cents per gallon to refiners who blend ethanol with gasoline and impose an import tariff as a deterrent to foreign competition. The tax credit was worth an estimated $4.7 billion last year.

“The U.S. tariffs are prohibitive to imports and should be allowed to expire,” Mr. Desplechin said.

A study by economists at Iowa State University said that ending protection for U.S. producers would reduce ethanol prices by 12 cents per gallon in 2011 and 34 cents per gallon in 2014. At the moment most gasoline sold in the United States contains 10 percent ethanol — a limit that the U.S. Environmental Protection Agency may increase to 15 percent this autumn.

The study also said that if the subsidies were eliminated, the effect on U.S. corn and ethanol demand would be minimal, since Congress already mandates the use of renewable fuels. It said U.S. corn-ethanol production would continue to rise to about 14.5 billion gallons by 2014, without the credits or tariffs.

Congress has not yet decided what to do, but many in industry expect a compromise, renewing the tax credit but at a lower rate.

“The industry is expecting 36 cents,” for the tax credit said Cole Gustafson, a professor of agribusiness and applied economics at North Dakota State University. “The issue is mostly dependent on the federal budget situation and whether sufficient funds can be found.”

Biofuel production in Europe is also heavily subsidized. All production is protected by tariffs — up to 63 percent on ethanol — and subsidies that add up in total to 0.5 euro cents, or 0.7 cents, per liter of biodiesel and 0.74 euro cents per liter of ethanol produced, according to figures from the Global Subsidy Initiative of the International Institute for Sustainable Development, a research organization based in Canada.

Tom Buis, chief executive of Growth Energy, an American industry coalition of ethanol supporters, called last month for continuing U.S. government support — if not through tariffs, then through investment in infrastructure improvements, more flex-fuel vehicles and increased blending levels.

The industry hopes to receive approval soon from the Environmental Protection

Agency for an increased cap on blending ethanol in gasoline — allowing cars built since 2007 to use regular gasoline blended with ethanol levels of 15 percent instead of 10 percent.

According to some industry estimates, shifting to the 15 percent blend, known as E15, would create about 136,000 jobs in the United States, reduce greenhouse gas emissions by eight million tons a year and reduce reliance on foreign oil. 

Lula inaugurates work on Brazil's biggest ethanol pipeline

Published November 24, 2010

http://latino.foxnews.com/latino/money/2010/11/24/lula-inaugurates-work-brazils-biggest-ethanol-pipeline/

Sao Paulo –  President Luiz Inacio Lula da Silva inaugurated construction Tuesday of what will be Brazil's biggest pipeline for ethanol.

Lula, a former metalworker, soldered the first pipe joint of the 202-kilometer (126-mile) pipeline, which will be finished in mid-2014 with a capacity for transporting 21 billion liters (5.5 billion gallons) of ethanol per year.

The first phase of the project will start operations in 2012, according to the government.

In Riberao Preto, an agribusiness city 313 kilometers (194 miles) from Sao Paulo, Lula gave an accounting of the progress made in the ethanol industry since he took office in January 2003, during which time Brazil reached its highest production and export volumes of the sugar-based fuel.

"I managed to sell the idea that humanizing the work in the sugarcane fields was important for selling ethanol to other countries," the president said.

Gasoline in Brazil is mixed with 25 percent ethanol, and more than 90 percent of automobiles leave the factory with flex-fuel technology incorporated, which permits motors to run on either of the two fuels or a combination of both.

Once complete, the pipeline will replace daily delivery runs by 1,500 tanker trucks.

At present, 95 percent of ethanol transport is done by tanker trucks.

The construction initiated Tuesday is the first part of a project to transport the ethanol produced in the interior states of Goias and Mato Grosso do Sul to the refineries of Sao Paulo, a distance of 850 kilometers (530 miles) covered by pipelines and riverboats.

In 2013 the riverboat segment will begin operations on the Tiete and Parana rivers, with vessels capable of transporting 7,200 cubic meters (254,000 cubic feet) of ethanol, according to Transpetro, a subsidiary of state energy giant Petrobras.

The system, with investments estimated at $5.7 billion reais ($3.28 billion), will be integrated with existing pipelines in the coastal region of Sao Paulo and will facilitate ethanol exports through the port of Santos.

DOE study: Ethanol pipeline could be feasible

July 20 2010

http://www.businessweek.com/ap/financialnews/D9H2VCT00.htm

SIOUX FALLS, S.D.

A dedicated ethanol pipeline could be profitable if the biofuel expands beyond its use as a 10-percent additive in standard cars, a new government study suggests.

A U.S. Department of Energy study released Monday said the nation would first have to boost its use of the alternative fuel either through greatly expanded use of E85, an 85-percent blend that runs in flexible fuel vehicles, or a transition to 15- and 20-percent blends in standard cars.

Assuming ethanol demand volume of 2.8 billion gallons a year and a project construction cost of $4.25 billion, a pipeline would need to charge an average tariff of 11 cents more per gallon than if the fuel was moved by rail, barge or truck.

"Even at a lower pipeline construction cost ($3.75 billion), significant financial incentives would be required to make the pipeline profitable if ethanol blends remain capped at 10 percent and E85 demand is not significantly expanded," the study found.

The Energy Department was considering a hypothetical project, but top ethanol producer Poet is already looking at moving its product by pipe.

Sioux Falls-based Poet and Magellan Midstream Partners LP are studying the feasibility of a $3.5 billion, 1,800-mile pipeline that would send ethanol from plants in Iowa, South Dakota, Minnesota, Illinois, Indiana and Ohio to distribution terminals in the northeastern United States.

The companies' analysis of their project concludes that it is economically viable with transportation rates about 15 percent lower than rail rates. The venture becomes more viable if flexible fuel vehicles that run on E85 become more popular and the Environmental Protection Agency allows higher concentrations of ethanol in gasoline.

The EPA recently announced that it would wait until this fall to decide whether U.S. car engines can handle the higher blends,

The ethanol industry has maintained that there is sufficient evidence to show that a 15 percent ethanol blend in motor fuel will not harm the performance of car engines. The refining industry, small engine manufacturers and some environmental groups have argued against an increase.

Poet said a renewable fuel pipeline would enhance the transportation efficiencies for the domestic renewable fuels industry.

"Pipelines are the most reliable, cost effective and safest mode of transportation capable of moving large volumes of liquid energy from where it is produced to where it is consumed," the company said in a statement.

A viable ethanol pipeline does face several challenges, the Energy Department said.

Ethanol tends to cause more internal cracking of carbon steel pipe than gasoline or diesel, but the study found that an ethanol pipeline can operate safely and without stress corrosion cracking when appropriate measures are taken.

Such a project is unlikely to find affordable financing because of demand and supply uncertainty, and it would require government financial assistance.

The Energy Department said there are also siting and regulatory barriers.

"Environmental assessments for a dedicated ethanol pipeline could face more than average complications due to its first-of-a-kind nature and a growing public resistance to the ethanol industry," the study noted.

U.S. does not have infrastructure to consume more ethanolJanuary 4, 2011http://www.purdue.edu/newsroom/research/2011/110104TynerWall.html

WEST LAFAYETTE, Ind. - The United States doesn't have the infrastructure to meet the federal mandate for renewable fuel use with ethanol but could meet the standard with significant increases in cellulosic and next-generation biofuels, according to a Purdue University study.

Wally Tyner, the James and Lois Ackerman Professor of Agricultural Economics, and co-authors Frank Dooley, a Purdue professor of agricultural economics, and Daniela Viteri, a former Purdue graduate student, used U.S. Department of Energy and Environmental Protection Agency data to determine that the United States is at the "blending wall," the saturation point for ethanol use. Without new technology or a significant increase in infrastructure, Tyner predicts that the country will not be

able to consume more ethanol than is being currently produced.

The federal Renewable Fuel Standard requires an increase of renewable fuel production to 36 billion gallons per year by 2022. About 13 billion gallons of renewable fuel was required for 2010, the same amount Tyner predicts is the threshold for U.S. infrastructure and consumption ability.

"You can't get there with ethanol," said Tyner, whose findings were published in the December issue of the American Journal of Agricultural Economics.

Tyner said there simply aren't enough flex-fuel vehicles, which use an 85 percent ethanol blend, or E85 stations to distribute more biofuels. According to EPA estimates, flex-fuel vehicles make up 7.3 million of the 240 million vehicles on the nation's roads. Of those, about 3 million of flex-fuel vehicle owners aren't even aware they can use E85 fuel.

There are only about 2,000 E85 fuel pumps in the United States, and it took more than 20 years to install them.

"Even if you could produce a whole bunch of E85, there is no way to distribute it," Tyner said. "We would need to install about 2,000 pumps per year through 2022 to do it. You're not going to go from 100 per year to 2,000 per year overnight. It's just not going to happen."

And even if the fuel could be distributed, E85 would have to be substantially cheaper than gasoline to entice consumers to use it because E85 gets lower mileage, Tyner said. If gasoline were $3 per gallon, E85 would have to be $2.34 per gallon to break even on mileage.

There is talk of increasing the maximum amount of ethanol that can be blended with gasoline for regular vehicles from 10 percent to 15 percent. But Tyner said that even if the EPA does allow it, the blending wall would be reached again in about four years.

Tyner said advances in the production of thermo-chemical biofuels, which are created by using heat to chemically alter biomass and create fuels, would be necessary to meet the Renewable Fuel Standard. He said those fuels would be similar enough to gasoline to allow unlimited blending and would increase the amount of biofuel that could be used.

"Producing the hydrocarbons directly doesn't have the infrastructure problems of ethanol, and there is no blend wall because you're producing gasoline," Tyner said. "If that comes on and works, then we get there. There is significant potential to produce drop-in hydrocarbons from cellulosic feedstocks."

Corn Stocks Plunging to 1974 Low as China Adds Brazil-Sized Crop to Demand

Jun 20, 2011 3:26 PM CT

http://www.bloomberg.com/news/2011-06-19/record-corn-harvests-can-t-meet-world-demand.html

Even a fifth consecutive year of record global corn harvests will fail to meet demand for food, fuel and livestock feed, reducing world stockpiles to the lowest in two generations.

Consumption will rise 3 percent in the next marketing year, a 16th consecutive annual gain that saw demand jump 66 percent, according to U.S. Department of Agriculture estimates. Inventory will drop to 47 days of use, the fewest since 1974, the data show. Waterlogged fields in the U.S., the largest exporter, will curb yields, Goldman Sachs Group Inc. says. Corn may jump 36 percent to a record $9 a bushel if conditions worsen, Morgan Stanley says.

Corn purchases are accelerating as droughts and floods limit output gains in everything from soybeans to wheat, driving the Standard & Poor’s Agriculture Index of eight commodities 60 percent higher in 12 months. China, the world’s second-biggest consumer after the U.S., will use 47 percent more than a decade ago, adding an amount greater than the entire crop of Brazil, the third-largest producer.

“There is a storm developing in agriculture,” said Jean Bourlot, global head of commodities at UBS AG in London. “If we have the slightest disruption in any part of the world, the effect on the price will be considerable.”

Corn has risen 5 percent in Chicago this year, even after dropping 7.4 percent last week to close at $6.60 on June 17. Today, the grain settled at $6.605, up 0.5 cent. Prices averaged about $7.02 since Dec. 31, headed for the highest annual average ever. While investors should be cautious for now, “long term, I think $6 to $7 is a normal price,” Bourlot said. Costs are rising for Tyson Foods Inc. (TSN), the biggest U.S. meat processor, and ethanol maker Archer Daniels Midland Co.Commodity Index

The S&P GSCI index of 24 commodities advanced 5.6 percent this year, and the MSCI World Index of equities was unchanged. Treasuries returned 3.2 percent, a Bank of America Merrill Lynch index shows.

Global production will rise 5.6 percent to 866.2 million metric tons in 2011-2012, still too little to meet demand of 871.7 million tons, according to the USDA, which combines variable local marketing years for its estimates.

China’s pork consumption doubled in the past two decades and demand for chicken quadrupled, the USDA estimates, boosting requirements for grain-based animal

feed. Surging energy prices and subsidies spurred ethanol production, with the U.S. industry using seven times more corn than 10 years ago.

“For the livestock industry, the ethanol industry, and the food industry, it’s going to be a food fight,” said John Cory, the chief executive officer of Rochester, Indiana-based Prairie Mills, which processes corn meal and corn flour. “Any kind of weather problems are really going to be a significant problem.”

U.S. Farmers

Corn fell last week as drier weather enabled U.S. farmers to complete about 99 percent of expected plantings by June 12. A total of 69 percent of crops were in good or excellent condition. Above-average prices will spur farmers to keep sowing even if it means lower yields, Goldman Sachs said in a report June 13. The USDA will release its next acreage and inventory estimates on June 30.

South American producers will also grow more, said Lawrence Kane, a market adviser at Stewart-Peterson Group in Yates City, Illinois. Corn planting starts in September in Argentina and a month later in Brazil.

Demand may not expand as fast as anticipated by the USDA as economic growth weakens. Indexes tracking manufacturing in the New York and Philadelphia regions contracted this month, reports last week showed. Japan entered its third recession in a decade, and the Australian economy shrank the most in 20 years in the first quarter. China raised bank-reserve requirements to a record last week to cool the fastest inflation in three years.Meat Prices

Livestock owners may cull herds, increasing meat supply, because of higher feed costs. Wholesale choice-beef prices dropped 9.9 percent since reaching a record April 5, and pork is down 2.6 percent from a May 16 high, USDA data show. Bacon retailed at $4.77 a pound in May, 24 percent more than a year earlier, data from the Bureau of Labor Statistics show.

Farmers also may replace corn with wheat in feed, because the grain is the cheapest relative to corn in 15 years. Effingham Equity, a feed and farm-supply company in Effingham, Illinois, will add wheat in hog-feed rations for the second time in a quarter century, said Mark Tarter, the grains-department manager. Tyson Foods is using some wheat for poultry, said Gary Mickelson, a spokesman at the Springdale, Arkansas-based company.Higher Feed Costs

Higher feed prices will add $500 million to Tyson’s costs in its fiscal year ending in September, Chief Operating Officer James V. Lochner told investors on a conference call May 9. Corn and soybean meal account for about 42 percent of spending to raise chickens, which generated more than 34 percent of sales in fiscal 2010.

Any decline in demand from livestock producers will be overwhelmed by the anticipated jump in Chinese consumption. The nation will use a record 181 million tons in the year that starts Oct. 1, the USDA said in a June 9 report. China’s pork production will reach an all-time high of 52.5 million tons in 2011, while chicken output will advance to 13.2 million tons, the most ever, according to the USDA.

“People just don’t want to give up a better diet once they shift to eating more meat,” said Steve Nicholson, a commodity procurement specialist at International Food Products Corp., a distributor and adviser on food ingredients in Fenton, Missouri. He predicts prices above $8 before the end of the year.Poor Nations Hurt

While higher prices help farmers, they are “devastating” for the poor in developing nations, Angel Gurria, secretary general of the Paris-based Organization for Economic Cooperation and Development, said in a report June 17. Cereal costs may average 20 percent more and meat 30 percent more over the next decade than in the last one, the group said in the report.

Higher oil prices mean corn would probably have to exceed $9 to trim demand from ethanol producers, said Dan Basse, the president of AgResource Co., a farm researcher in Chicago. The U.S. will convert a record 5.05 billion bushels into the fuel in the next year, compared with 707 million in 2002, the government estimates. Denatured-ethanol futures jumped 64 percent in the past 12 months on the Chicago Board of Trade.

While the U.S. Senate voted June 16 to eliminate a tax credit and a tariff that subsidize ethanol production, analysts said the measure is unlikely to become law and wouldn’t alter demand as long as fuel prices remain high. Also, Congress hasn’t changed the government mandate for renewable fuels, which will rise to 15 billion gallons in 2015 from 9 billion in 2008.Gasoline Prices

Regular gasoline on average cost $3.646 a gallon at the pump yesterday, 33 percent more than a year earlier, according to the American Automobile Association. Prices peaked on May 4 at $3.985, the highest in almost three years.

“It’s not going to make a substantial difference to the amount of ethanol produced, to the price of corn, or farm income,” Mark McMinimy, the energy and agriculture policy analyst for MF Global Inc. in Washington, said of the Senate measure. “If oil prices tank and corn prices stay near a high, then ethanol production is going to recede to the level of the mandate. But the mandate continues to go up.”

U.S. farmers are contending with extreme weather in several agricultural states. Rain delayed planting from North Dakota to Ohio, and floods damaged crops along the Mississippi, Ohio and Missouri rivers.

Lost Crops

Those delays increased the risk of supply being lost, said Shawn McCambridge, the senior grain analyst at Prudential Bache Commodities LLC in Chicago. Should hot, dry weather in July or August hurt crops, prices may rise to $8.50, he said. Corn planted in wet soil has shallower roots, diminishing its ability to withstand such conditions.

Temperatures as much as 10 degrees Fahrenheit above normal and dry soil from Texas to North Carolina are already threatening yields, according to Michael Cordonnier, the president of the Soybean and Corn Advisor in Hinsdale, Illinois, a crop forecaster. The concern now is that the heat moves north, he said.

The late planting also puts the crop at greater risk of damage from too much rain during the growing season and frost nearer to the harvest in September, said Allen Motew, a meteorologist at QT Weather in Chicago.

This year’s weather patterns are similar to 1993 and 2009, Motew said. Yields rose in 2009 because the summer months were cool and there was no frost before the harvest, he said. In 1993, yields plunged 23 percent.

“July and August will tell us, because the corn crop is made in that period of time,” said Liddell of Rabo AgriFinance, a unit of Utrecht, Netherlands-based Rabobank Groep. “More things have gone wrong than have gone right.”

Petrobras to invest billions in its biodiesel, ethanol segmentsAugust 15, 2011http://www.biodieselmagazine.com/articles/7974/petrobras-to-invest-billions-in-its-biodiesel-ethanol-segments

Brazilian oil and gas conglomerate Petrobras, through its wholly-owned biofuel subsidiary Petrobras Biocombustivel, plans to invest $2.5 billion in increasing biodiesel and ethanol production between 2011 and 2015. The total amount is part of $4.1 billion earmarked for its total biofuel business, with its business plan calling for investments totaling approximately $224.7 billion in the next five years.

Although increasing ethanol production will be a priority for Petrobras—accounting for nearly 76 percent of the total investment in biofuels production in the four-year span—the company intends to invest $600 million to bolster its biodiesel and agricultural supply segments in hopes of maintaining a 25 percent domestic market share in the coming years.  This figure, according to the company, would take into account the organic growth in demand for diesel and Brazil’s B5 regulation currently in effect.

With the addition of its 50 percent ownership stake in in-country biodiesel producer

BSBios Industria e Comercio de Biodiesel Sul Brasil S.A. in July, Petrobras currently has a total of five operating biodiesel plants with a combined capacity of approximately 700 MMly (185 MMgy). Moving forward, the company now intends to focus its efforts in the State of Para where it plans to deploy a plant to supply biodiesel to Northern Brazil, as well as concentrate on its Belem project, which will produce green diesel—or renewable diesel—in Portugal in partnership with Portuguese company Galp.

Meanwhile, in its biofuels research area, Petrobras intends to invest $300 million to advance the development and commercialization of second-gen biofuels, such as cellulosic ethanol, as well as increase research into aviation biofuels and improve production processes to keep the company at the forefront of sustainability.

New lobbying push targets keeping ethanol blenders' credit for E85 only

17Oct2011

http://www.platts.com/RSSFeedDetailedNews/RSSFeed/Oil/6589274

With the tax credit for ethanol due to expire at year's end, ethanol backers have formed a new coalition to raise funds for a lobbying campaign to amend the federal tax law, but only for E85.

The group, the Coalition for E85, is not looking to extend the life of the tax credit for E10 fuel, which is now widely distributed throughout the US. It says it is prepared to sacrifice that subsidy in order to get taxpayer underwriting for the development of E85, a blend of 85% ethanol and 15% unleaded.

Currently, fuel blenders receive a 4.5 cents/gal tax credit for E10 and a 38.25 cents/gal credit for E85 under the Volumetric Ethanol Excise Tax Credit (VEETC), which expires in December.

Under the VEETC, the 14 billion gallons of ethanol used in E10 cost approximately $6.3 billion a year, while the subsidy for the 120 million gallons in E85 cost about $54 million a year.

The Energy Policy Act of 1992 defines E85 as an alternative fuel, but the blend does not qualify for the alternative fuel credit under the Internal Revenue Code. It was excluded to avoid any instance where ethanol would receive both the VEETC and the Alternative Fuel Credit.

However, with the possible expiration of the VEETC, the question of ethanol double-dipping should no longer be an issue, the coalition contends. It wants E85 to be eligible for a tax credit, which should be extended into 2012 and then for another

five years, it says.

The coalition says it represents retailers, ethanol producers, and equipment and automobile manufacturers. It is fronted by veteran ethanol advocate Phil Lampert. Its goal is to raise an initial $75,000 to pay well-known Washington lobbying firm Van Scoyoc Associates to advance its agenda in Congress, according to a letter it sent out soliciting funds.

The coalition says $75,000 is "the minimum level needed to pay for the government relations effort," according to the letter. For the money, Van Scoyoc has agreed to mount an "intensive" three-month campaign.

In October, it will develop "a unified message," draft a policy paper and communications materials, and meet with members of Congress and their staffers. In November, it will draft language for a bill and request a revenue estimate. It hopes to get the measure included in any tax extenders package that Congress approves by December, the letter says.

More than 60 different tax extenders are due to expire at the end of 2011. The coalition believes Congress will try to deal with the issue in late 2011 or early 2012. Even if Congress allows most of the key extenders to expire, the coalition believes its lobbying campaign will lay the groundwork for Congress to retroactively extend the ethanol credit, the letter says.

"The ethanol industry has reached a consensus that the sale of E10 will continue absent the existing incentive," according to the coalition. "However, sales of E85 will be dramatically impacted with the loss of the VEETC, as E85 requires the incentive to allow motorists to achieve a competitive price of a gasoline gallon equivalency to regular unleaded gasoline."

"Failure to preserve the E85 option may negatively impact the future sale of other mid-level ethanol blends, such as E30," the coalition claims in its letter. PETROLEUM MARKETERS WILL JOIN COALITION

Meanwhile, the Petroleum Marketers Association of America, a trade group representing gasoline wholesalers and retailers, has decided to join the coalition.

"While $54 million seems like a lot for 2,500 dispensers, the greater concern probably has to be the entire Flex Fuel Vehicle program," said PMAA president Dan Gilligan. "Ford, GM and Chrysler have been manufacturing millions of FFVs in cooperation with the U.S government with the specific policy goal of having E-85 as an alternative to gasoline. If the ethanol tax credit is not extended for E-85 blending, the entire FFV program might die. Auto manufacturers might simply quit making FFVs."

Flex fuel vehicles can burn E85 as well as gasoline.

In a legislative white paper, the coalition acknowledges that only 1% of ethanol is sold as E85 in the US, but believes the fuel will play an increasing role under the volume requirements of the federal Renewable Fuel Standard.

If the tax credit isn't extended, 9 million drivers of flex-fuel vehicles will pay as much as 38 cents/gal more and small businesses could be forced to "close their pumps," according to a press release drafted by Van Scoyoc Associates.

According to a report by the Energy Information Administration, E85 was being sold at only 2,454 stations as of September 30 this year. That would put the cost of the $54 million incentive for the fuel at roughly $22,000 per dispenser, assuming one pump per station.

Most of the E85 stations are concentrated in the Midwest. The largest number is in Minnesota, with 362 outlets. Thirteen states have between 1 and 10 sites, while six states have none at all.

Other members of the Coalition include E85 supporters Propel Fuels, Protect, Bosselman Biofuels, the Nebraska Ethanol Board, Clean Fuels Development Coalition and the Nebraska Ethanol Industry Association.

IEA report: Sustainable Production of Second-Generation Biofuels

RFA 2011 Ethanol Industry Outlook

RFA General US Ethanol Statistics

Interactive EIA table of Ethanol Consumers and Producers

State Level Employment Impacts of Failure to Renew VEETC

US Ethanol Imports: Brazil and Caribbean Basin

World Fuel Ethanol Production Statistics by the Renewable Fuels Association

Map of Corn Grain Production in the USA, 2010

Biofuels Incentives: A Summary of Federal Programs

Brazil’s Ethanol Industry: Looking Forward

Contribution of the Ethanol Industry to the Economy of the United States

Ethanol Facilities’ Capacity by State

US Bio-refineries location

Importance of the Ethanol Tax Incentives in Driving the Growth of Biofuels

USDA Agricultural Marketing Service Report: Agriculture Transportation Chapter 4; Biofuels