Cheaper or greener: Colombia eyes US ethanol with trepidation

The availability of cheap ethanol has become a contentious issue in the United States. While American drivers may see the benefits of supplies from the most efficient ethanol producer on earth, meaning that the fuel in their car may be cheaper, for producers and farmers, lower prices are not always better.

Brazil's ethanol industry has been in the news over this issue recently, with arguments over the imposition of tariffs and volume caps on US imports. And on the other side of the continent in Colombia, I found the debate is just as fierce.

As the 13th largest producer of sugar in the world, Colombia is sitting on a substantial natural resource. The production and processing of sugarcane as a feedstock is focused on a region called the Cauca River Valley, and the concentration makes the industry vulnerable to weather shocks — which is exactly what happened in 2017. Colombia does not have a sugarcane "season" and the commodity can be harvested all year round.

Heavy rains this year coupled with the El Nino weather phenomenon in 2016 hampered sugarcane yields and consequently reduced ethanol production. In March, rainfall was more than 170% above the 1971-2000 historical monthly average, according to the Colombian Institute of Hydrology, Meteorology and Environmental Studies. In addition, the then better return on sugar versus ethanol increased the preference for the sweetener over the alcohol.

From a sugar production perspective, the weather has not had a major impact. As of the end of July, 2017's sugar production was 1.18 million mt, just 2.7% lower year on year, with the cane crush at 13.05 million mt, just 1.2% behind 2016's level. If the weather remains fine then production could be made up.

Kingsman, an analytical unit of S&P Global Platts, still expects production to be higher than last year at 2.52 million mt raw value, compared with 2.2 million mtrv a year earlier.

However, while sugar looks set to get back on track, ethanol production has declined. Colombian fuel ethanol production in the first seven months of the year totaled 206 million liters, down 17% year on year.

Kingsman expects total 2017 production to be 380 million liters, down 12.5% year on year, while demand is expected to reach 420 million liters, down 4.4%, after the slow start to the year.

In response to the lack of domestic production, Colombia's Ministry of Energy and Mines reduced the typical blend mandate from between 8% and 10% to 6% in April and then to zero in May. This had obvious direct impacts on demand, resulting in an 18.4% year-on-year drop in January through July consumption, but there was still not enough ethanol available. Consequently, the government allowed increased imports into the country to cover the shortfall, opening the floodgates to imports from the world's biggest ethanol-producing nation — the US.

Colombia imports in the first seven months of 2017 totaled 22.8 million liters, more than double the 11.2 million liters over the same period in 2016. Ethanol imports for the full year are expected to reach 40 million liters, a rise of 116% from 18.5 million liters in 2016.

This flood of imports came in response to the lack of domestic supply. However, domestic producers are now urgently trying to turn this tap off, citing better greenhouse gas savings from sugarcane ethanol compared with corn-based ethanol as a key factor. And with Colombia part of the Paris Climate Change agreement, producers are underlining ethanol from sugarcane as a better option.

However, as of May 1, resolutions 9 0454 of 2014 and 4 0565 of 2015 have been repealed. What that means is that the legislation that allows for any domestic "deficit in supply" to be met by authorized imported volumes as needed has been removed, including the detail that defines this deficit. Importers therefore do not have to rely on the government to decide on whether to import ethanol into Colombia.

US ethanol is typically cheaper than domestic Colombian production.

The price of fuel ethanol in Colombia in July was Columbian Peso 8,564.24/gal, according to National Federation of Biofuels of Colombia, or $2.887/gal. The July monthly average of Platts' assessments of benchmark Chicago Argo ethanol was $1.52255/gal, over $1.36/gal cheaper than in Colombia.

The price of ethanol in Colombia is typically based on the production cost in the country, which is linked to the price of sugar and set by the Ministry of Mines and Energy. When you compare this value to international prices it becomes clear there is fuel ethanol available on the international market that is cheaper.

Domestic production, meanwhile, is increasing, sugarcane availability not withstanding. A facility built by Colombia's Bioenergy reached a production level of 238,000 liters/day at the beginning of August. Once at full capacity, the plant's 500,000 l/d will boost the nation's previous 1.35 million l/d output capacity by 37%, according to the National Federation of Biofuels.

Regardless of this increase in domestic production, Colombia's ethanol policy is going through a period of flux. The government is looking to adjust the pricing mechanism in the country to better reflect the dynamics of the international market. This, coupled with the now open market, has sparked concerns for local producers.

The question remains as a consumer — isn't it the case that more ethanol is better than less ethanol? And, as I pull up at the gas station to fill up my car, will I choose the greener option or the cheaper one?