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FEATURE: US ethanol producers look to exports, if 2014 RFS caps domestic demand

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FEATURE: US ethanol producers look to exports, if 2014 RFS caps domestic demand

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Even before the US Environmental Protection Agency signaled last weekthat it planned to cut its biofuels mandate for 2014, US ethanol makers werealready bullish on the prospects of growing exports, banking on what looks tobe a record corn harvest.

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But now that the cut -- and a significant one at that -- has beenformally proposed, the ethanol industry may have to scramble to find thoseexport markets to soak up what is sure to be a glut of domestically producedbiofuels.

And going forward, experts say the EPA's proposed 2014 Renewable FuelStandard puts the entire industry in limbo, if capped US demand leavesproducers with only exports to fuel growth.

"For this year, exports are definitely the pathway going forward," saidBenjamin Salisbury, a Washington-based analyst with FBR Capital Markets. "Thequestion for the marketplace is, what does it mean for plantings and yields infuture years?"

The EPA last week proposed for the first time a significant reduction tothe RFS, calling for 15.21 billion gallons of biofuels -- including up to13.01 billion gallons of corn-based ethanol -- to be blended with the USgasoline and diesel pool in 2014.

The proposal, which must still undergo a public comment period andsubsequent review before being finalized, likely next spring, represents a cutof some 1.34 billion gallons of biofuels from the 2013 rule, with the EPAciting the inability of the US marketplace to absorb blends of greater than10% ethanol.

Meanwhile, the ethanol industry has estimated that US production ofcorn-based ethanol could top 14 billion gallons this year, on the backs of anexpected 14 billion bushel corn harvest and favorable margins for biofuelsproducers.


Geoff Cooper, the Renewable Fuels association's vice president ofresearch and analysis, said the US ethanol industry is on pace to export about600 million-650 million gallons this year, a drop from 739 million in 2012.

So, ethanol exports would have to increase significantly in 2014 to makeup for the US oversupply. Cooper noted, however, that the US exported a record1.2 billion gallons in 2011.

"We believe there is, at a minimum, enough ongoing global demand tosupport at least 700-750 million gallons of exports, which would be about halfof the lost RFS volume," he said in an email. "I believe the 2011 recorddemonstrates there is room for growth beyond recent/current export volumes."

Canada has been the largest customer of US ethanol exports, accountingfor 55% this year, followed by the United Arab Emirates (8%), the Philippines(7%) and Brazil (7%), according to the RFA.

Archer Daniels Midland CEO Pat Woertz said the potential to grow exportsis significant, given that US corn-based ethanol is the lowest-costtransportation fuel in the world, about 80 cents/gal cheaper than RBOB.

"The opportunity is to grow [exports], particularly in countries likeBrazil, Canada, some to Europe," Woertz said in a recent conference hosted byMorgan Stanley just before the EPA announced its proposed 2014 RFS. "There'seven some going to Asia and the Middle East.

"So, exports will grow because of economics, but they'll also grow fromadditional outreach and marketing of US-based ethanol to some of the exportcountries," he said.

Analysts, however, cautioned that exports are dependent on severalfactors, many of which are out of the hands of producers: pricecompetitiveness against other ethanol exports, primarily sugar cane ethanolfrom Brazil; government policies mandating biofuels use; and tariffs.

The EU, for example, began imposing this year an $83.03/mt tariff onimports of US ethanol, which the industry has been fighting.

"My sense is that exports can to some extent make up the difference inthe short-term, but that's an awfully unreliable source of demand," said IanBerry, a Milwaukee-based biofuels analyst with Brock Associates, noting thevolatility in year-to-year exports.


Brazilian sugar cane ethanol producers, for their part, said the proposedRFS, if finalized, would make the global ethanol trade more fiercelycompetitive, and they have also lobbied the EPA to raise the 2014 biofuelsmandate.

The EPA has determined that Brazilian ethanol, due to its lowerlife-cycle emissions, qualifies as an advanced biofuel, which has its ownmandate, while US corn-based ethanol does not. But in its proposed 2014 RFS,the advanced biofuels mandate is cut by 550 million gallons from the 2013rule, and many observers expect the bulk of the advanced biofuels pool to befilled by US biodiesel.

That could leave Brazilian ethanol producers also looking to othercountries to take their product, putting them in competition with US cornethanol producers also seeking to export.

Brazil, the world's second largest producer of ethanol behind the US,recently estimated that it will produce 7.02 billion gallons of ethanol thisyear, with exports expected to reach almost 750 million gallons.

"The rule is obviously going to affect the flow of trade among countriesin the world that use ethanol for transport," said Leticia Phillips, the NorthAmerican representative for UNICA, the Brazilian sugar cane industryassociation. "This is something EPA should have in mind before finalizing therule."

--Herman Wang, by Derek Sands,