Amid the devastation caused in Texas by Hurricane Harvey last week, one industry managed to see a ‘mild’ silver lining. The serial shutdowns of oil refineries, of which the area around Houston counts many, led US gasoline prices to shoot up; a move soon imitated by Brazil’s Petrobras, which raised its prices as well. This bumped up the value of ethanol, a rival fuel, of which the US and Brazil are the world’s largest producers. Biofuel farmers rejoiced at the prospect of better margins.
It’s easy to see why. The industry has a had a tough decade, starting with a major US drought in 2012 that curtailed corn output and lead ethanol farmers to cut production. But biofuel prices do not solely depend on the value of inputs. They are also closely tied to variations in oil prices, ethanol’s competitor as an automotive fuel. In 2015, as oil fell off a cliff, biofuel prices also tumbled. They have never really recovered.
That came after a golden era for renewable fuels. In 2005, the US Congress created the Renewable Fuel Standard program, which requires refiners to blend ethanol with gasoline. Biofuel production rapidly expanded in response: by 2010, it had tripled. Over that period, the EU also stepped on the gas on biofuel requirements, demanding more biofuel blending in petrol (a target of 5.75 percent by end 2010, up from 2 percent required in December 2005).
The sector’s future is now looking much more uncertain. At the heart of many debates is the argument that crops being turned into biofuels could have gone toward making food instead. To respond to such concerns, the EU is proposing to phase out the use of “first-generation biofuels” – those produced from arable crops – beyond 2020. Instead, it is putting its weight behind “advanced” biofuels, generated from non-edible biomass. But these are harder to extract and still under development.
In the US, Donald Trump recently pledged to stick to ethanol’s current annual target. But those calling for an expansion of biofuels’ mandate stand to be disappointed: observers say people close to the president, both from the administration and corporate circles, don’t have much faith in the stuff. What’s more, the US Environmental Protection Agency does not seem inclined to approve a proposed waiver of emissions-focused regulations that limit the sale ethanol blends during summer months.
And then there is the damaging impact of trade spats, with two of the US’s main customers looking increasingly off limits to American exporters. Last month, Brazil announced its decision to slap a 20 percent tariff on ethanol imports above 600 million liters. This is a meaningful ceiling: in the year through June, the US sold more than one billion litres to the country. China had already imposed punitive tariffs on imports of US ethanol in January.
Yet producers have at least one reason to cheer. The recent overhaul of Brazil’s biofuel policy, aimed at cutting the country’s carbon and nanoparticle emissions, is set to boost demand. That is certainly the view of Summit Agricultural Group, which inaugurated Brazil’s first large-scale ethanol plant – a $115 million project – alongside Fiagril in August. The firm aims to build a platform capable of producing 250 million gallons of corn ethanol within the next two years.
The world is not about to run out of biofuels. The revamp of existing plants and the construction of new facilities will add 850 million-900 million gallons to global ethanol production by 2020, according to Cobank. Not all of it may prove profitable, but some of it definitely will.
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