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Let's Do the Math

by Joel Velasco on Apr 15, 2010

You may have seen today's news release from the Renewable Fuels Association criticizing some of the economic data on this site and claiming that corn ethanol is less expensive than sugarcane ethanol. I just sent RFA a detailed reply addressing each of their claims – which I’m posting online.

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You may have seen today's news release from the Renewable Fuels Association criticizing some of the economic data on this site and claiming that corn ethanol is less expensive than sugarcane ethanol. I just sent RFA a detailed reply addressing each of their claims – which I’ll repeat for you below.

But before we get into it, let's just consider the basis of their argument – that corn ethanol is actually cheaper than sugarcane ethanol. If that's really the case, than why all the fuss? Let's end the subsidies, drop the trade protection and compete in an open market.

When ethanol competes, consumers win.

Here’s my e-mail to RFA's Geoff Cooper:

Spots vs. futures. Agree they should be comparable numbers. So, instead of using Chicago pricing, we obtained Platts’s New York Harbor pricing data for denatured anhydrous ethanol. As you will see that’s not going to change the numbers much. Happy to look at whatever you recommend but don’t think you can act like the VEETC doesn’t show up on the price of corn ethanol in U.S. (more on that below.) As for Brazil, the data was actually FOB Santos anhydrous directly exported to the United States since specs play a big role in pricing data and, had we used all ethanol exports, it would include hydrous ethanol (which goes to Caribbean and often ends up in U.S.) and that would make the Brazilian ethanol prices much lower. (I don’t think dehydrating with Hugo Chavez’s oil to get ethanol into the U.S. is the best way to strengthen our energy security.) Similarly, the ESALQ/CEPEA dataset would not provide an apple-to-apple comparison a number of reasons, particularly given various transportation routes to port and varying specs. I think you will agree that anyone that has looked at the data knows that there are a lot of other factors at play because there is no real global, competitive marketplace for ethanol, which is what we’re really asking for at the end of the day. Let’s just let prices sort themselves out for consumers’ sake.

Transportation Costs. Since we used Santos FOB anhydrous ethanol prices for Brazil, and are using New York Harbor as the delivery just to have a reasonable comparison, we’re quite confident on the Brazil-U.S. transport costs. Are you saying that it costs you more to transport ethanol to NY Harbor? Again, not to belabor the point, we believe that consumers – be them in New York or Iowa or Los Angeles – should be given a choice and, like General Motors advertisement now says, may the best one win. In a lot of places throughout the U.S., at varying times, corn ethanol will be more competitive than cane ethanol. At other times, sugarcane will be. The same applies for Brazil – we were net importers of ethanol from U.S. much of the 1990s. And that’s what is so great about the marketplace, consumers are the beneficiaries.

2009 Data. We’ll update with 2009 data. Would you do the same and show your chart back to 2004 or so? Our point is that consumers win when there’s competition, when there’s less price volatility (e.g., 2008). So, yes, right now U.S. ethanol prices are lower than Brazilian prices because of a number of factors, including the ones you mentioned but also currency fluctuations. Sometimes Brazilian prices are lower, and other times higher. That’s what great about open markets, consumers win when they have options. We can complement each other’s market. And, that’s why UNICA fought last year to get the Brazilian government to drop its tariff on ethanol imports. And I’m sure that some of RFA’s members are delivering ethanol in Brazil now just like they did for much of the 1990s when Brazil was a net importer of ethanol.

VEETC? In your pricing of U.S. ethanol are you presuming that the 45 cents per gallon VEETC subsidy doesn’t affect corn ethanol’s price? If not you should. Otherwise, by using Brazil pricing in your chart, you’re denying consumers (who happen to also be taxpayers as well) an apple-to-apples comparison. And even if you’re including the VEETC, you’re then not recognizing the nearly 10+ cents differential between the VEETC and the 54 cents tariff plus 2.5% ad valorem duty. Fuels market is a low margin business. 10 cents per gallon is a big deal!

Why Fear Competition? The thing that I really don’t understand is this. If corn ethanol is so competitive now, why are they worried about extending the tariff to keep out competition?  How can we be more expensive and cause of hundreds of thousands of job losses both RFA and Growth Energy claim? It would seem to me that you might be trying to have it both ways. Either corn ethanol is highly competitive and doesn’t need subsidies and tariff protection or you fear that competition would show that the U.S. ethanol industry, after 32 years of incentives, remains an industry in need of government bailouts. Which one is it?

And next time, let’s do it over a drink. Everytime you score one, I buy you a Caipirinha (made with sugarcane). And when I score one, you buy me a Bourbon (made with corn).

copyright 2010 Brazilian Sugarcane Industry Association