Ethanol and Mexico: the dream lives on

Mexico's emerging ethanol industry has been a hot topic for US ethanol producers and exporters over 2016, as draft legislation in the country put it front and center in a growing discussion about global ethanol markets. But with Mexico’s decision to not allow ethanol blending in its major population areas, and with Donald Trump now president-elect of the US, what could that mean for the budding ethanol trade flow between Mexico and the US?

Trump spoke several times during his campaign about the North American Free Trade Agreement, or NAFTA. The goal of NAFTA, enacted in 1994, was to reduce or eliminate tariffs on trade between Mexico, the US and Canada.

But Trump has criticized the agreement, saying "NAFTA was the worst trade deal in history" in a June speech. As part of his "7 Point Plan To Rebuild the American Economy by Fighting for Free Trade" from the same speech, he said he would submit notice that the US would withdraw from NAFTA if the agreement isn't renegotiated. Under NAFTA, a party can withdraw six months after providing written notice to the other parties.

But until January 20, when Trump takes office, market participants are hesitant to make any moves. Some market participants have said they expect little to no short-term impact on the market, others have said there is already concern that product shipped from the US in late December or early January could have duties on it when it arrives in Mexico.

So there is uncertainty, but until he takes office and begins executing his campaign promises, business continues. Mexico's fuel legislation was going to allow blenders to add up to 5.6% ethanol to the gasoline pool as an octane booster. It was not going to be a blending mandate, like the Renewable Fuel Standard in the US, but blending would have been allowed.

But hopes of Mexico emerging on the global ethanol importing stage like a debutante burst as the government announced in August that ethanol blending would not be allowed in the primary population centers. Mexico City, Monterrey and Guadalajara are now off the table for blenders.

The silver lining is that the rest of the country is still fair game.

Ethanol proponents, such as the US Grains Council, Growth Energy and the Renewable Fuels Association, were hopeful that ethanol could begin to replace MTBE as primary oxygenate in Mexico. MTBE has been linked to groundwater contamination, leading to the US phasing out its use in 2005. Supporters of ethanol also see it as a means of improving air quality in Mexico, a country that struggles with air pollution.

If Mexico blended ethanol into gasoline at 5.6% across the country it would create 790 million gallons of annual demand. With three major cities off the table, it could lower that number by up to 40%, according to some sources. But that still leaves about 475 million gallons of ethanol demand every year for the rest of the country, assuming a uniform 5.6% blending rate. Mexico, however, only has about 66 million gallons of annual production capacity. Producers currently use sugarcane as their primary feedstock but are looking at expanding the use of sorghum, also known as milo.

So there's still a healthy 409 million gallons in annual demand that would need to be met from somewhere else, at least until Mexico expands its production infrastructure.

The US, with annual production capacity of 14.9 billion gallons, is poised to be that supplier. As the cheapest source of ethanol in the world, and conveniently next door, the US has already sold some fuel ethanol to its southern neighbor. So far in 2016, Mexico has purchased 18.4 million gallons of fuel ethanol from the US, according to US Census Bureau data. That's 3% of total US fuel ethanol exports, unchanged from last year.

Brazil is typically the US' main competitor in the ethanol export world. But Brazil is currently focused on covering domestic demand and not exporting as much as they usually do. Sky-high global sugar prices have encouraged sugarcane producers to divert more of the crush toward sugar and away from ethanol. Sugarcane is the primary feedstock for Brazilian ethanol.

But there's still the challenge of getting blenders to use the biofuel rather than MTBE. A coalition of US producers and trade groups went to Mexico in May to talk with government officials and industry participants about ethanol's prospects.

"The world is short on octane and looking for low-carbon alternative fuels to meet the climate change goals set in Paris last December," said Ed Hubbard at the time, general counsel for the Renewable Fuels Association and member of the cohort that travelled to Mexico. So what is going to happen now that people can blend ethanol? Well, it's likely that the steady drip-drip-drip of ethanol exports into Mexico will increase. But before the slow trickle can become a reliable stream, Mexico would need to build out some of its import infrastructure.

Ryan LeGrand with the US Grains Council said there are rail lines and liquids ports to bring in product over land or sea, but "the tank infrastructure is not in place." There would need to be investment in tank infrastructure to handle ethanol imports.

However, increased gasoline imports into Mexico have encouraged market participants to already begin adding tanks to accommodate increased liquids imports.

The new legislation is in place after being approved in August. But this is only the first time the Mexican government has created legislation around ethanol blending. The US Grains Council and US biofuels industry groups continue to talk with the Mexican government to encourage additional blending across the country, and hopefully opening up the key metropolitan areas.