Wednesday, March 31, 2010

Gee, I wonder what Brazil will do...

With all their surplus sugar?
Brazilian yields are beating forecasts as a waning El Nino brings dry weather, boosting prospects for a record harvest. Mills began crushing cane early after two years of heavy rains pared output, said Maurilio Biagi Filho, the world’s second- largest grower.
“I had never seen a single mill operating in January before,” Biagi said in an interview on March 24. “This January, we had 90 of them working at full capacity.”
The Indian Sugar Mills Association on March 25 estimated production in the year ending Sept. 30 will be 17 million tons, up 1.5 million from a February projection. Output next season may be as much as 24 million tons, the group said.
‘Overestimated Deficit’
“The market had basically overestimated the extent of the deficit,” said Judith Ganes-Chase, a Katonah, a New York-based consultant. She forecast “single-digit” prices in 12 months, assuming favorable weather conditions.
The global supply shortfall will be 12.8 million tons this year, down from 14.8 million projected in February, Czarnikow Group Ltd. said on March 24, citing higher-than-expected output in India. The market will return to a surplus next year, according to London-based Czarnikow and Ratzeburg, Germany-based F.O. Licht. [More]
Now add in our economically perplexing approach of protectionism and its efficacy on importing the available ethanol from SA.
Before the EPA finalized the new mandates, imported sugarcane ethanol from Brazil competed directly with domestically produced corn ethanol. They received the same price. They both could be used by gasoline and diesel producers to meet the old mandates. And both qualified for tax credits. Because U.S. and Brazilian ethanol competed directly for the same market, the import tariff directly increased the profitability of the U.S. corn ethanol industry by increasing the cost to U.S. fuel producers of using Brazilian ethanol.
But the EPA ruling that sugarcane ethanol qualifies as a noncellulosic advanced biofuel means that corn ethanol and sugarcane ethanol are now differentiated products. Though they may be chemically identical, they are no longer economically identical. Brazilian ethanol can be used to meet the advanced biofuels mandate whereas corn ethanol cannot. Because advanced biofuels will be scarcer in supply relative to their mandate, their price will eventually be higher. This means that Brazilian ethanol will be imported to meet the advanced biofuel mandate first. Only if there is an excess supply of Brazilian ethanol available after meeting Brazil’s internal demands and the U.S. demand for advanced biofuels will Brazilian ethanol then become a competitor to corn ethanol. In essence, Congress and the EPA have created a U.S. biofuel mandate specifically for Brazil. This means that domestic gasoline producers will have to pay enough for Brazilian ethanol to induce Brazil to export enough to meet the mandate. Under this
scenario, the only impact of the import tariff is to increase the price that domestic
gasoline producers pay for Brazilian ethanol. As long as there is no alternative supply of domestically produced, noncellulosic advanced biofuels, there will be no benefit to the U.S. biofuels industry from maintaining the import tariff. The question the U.S. biofuels industry needs to ask is whether another biofuel will emerge that can meet this mandate. If so, then the import tariff may benefit the industry. [More][My emphasis]
I cannot prove with it hard numbers yet, but my underlying confidence in markets to patiently circumvent efforts to control them remains unshaken.  I also remain convinced ethanol proponents think their grip on policy-makers is absolute, which will tend to encourage them to push farther over the edge of market-based realities.

1 comment:

Anonymous said...

Let the sugar ethanol in, all will benefit