US ethanol market participants and trade groups Thursday decried the Brazilian government's Wednesday decision to levy a 20% tariff on ethanol imports above 600 million liters.
"We're very disappointed with this news," said Geoff Cooper, executive vice president at the US' largest ethanol industry group the Renewable Fuels Association. "It felt like we had been making progress in our discussions with Brazilian officials. We're not going to give up on continuing the dialogue with the Brazilians about this decision and its implications for both of our markets."
Brazil, the second largest ethanol producer in the world, began importing large volumes of ethanol in 2016 as high sugar prices made the sweetener more attractive to sugarcane mills than ethanol.
Through June, the US exported over 1.045 billion liters of ethanol to Brazil, according to US Department of Agriculture data.
That could mean that any further exports to Brazil would be subject to the 20% tariff. But it does not appear that exports from earlier this year above the 600 million liter level would be affected by the tariff.
"We haven't heard any indication that this would be retroactive in nature," said Cooper. "What isn't clear is when it would become effective." The decision could be entered into Brazil's official gazette within a few days, but whether the tariff would be in place immediately or the gazette entry would set a future date was not specified by the government.
US traders have been hesitant to update their export models yet.
"I think with the arbitrage where it is, it will not be a problem," said a US source. "But if the arb tilts back in favor of heavy exports from the USGC to Brazil, I think it will become a mess. Right now it is just a band-aid to calm the flex plants in the northeast of Brazil and try to not anger the US to the point that it starts some kind of a trade war."
With the tariff in place, ethanol prices in Brazil could climb and keep the arbitrage open despite the 20% tariff. But the tariff adds a new hurdle to overcome when traders eye Brazil for exports.
"We think Brazil will remain short of ethanol and will continue to import it from the US," said Bruce Pickover, biofuels director at PIRA Energy Group, a unit of S&P Global Platts. "We don't see where else Brazil can get the ethanol they need. I think the tariff will just increase the price of ethanol to consumers in the north and northeast region. It will help the producers in the region which is the main purpose."
The North and Northeast regions of Brazil are naturally short on ethanol and rely on transfers from the Center-South region, the largest ethanol producing region in the country. But since the Center-South has produced less ethanol in favor of sugar, the North and Northeast have had to rely on imports.
Sugarcane mills in Brazil had called for the tariff for months, saying imports from the US were unfairly hurting domestic plants. A vote on the tariff was delayed three times since early May.
Unica, a sugarcane industry group in Brazil, praised the decision in an emailed statement.
"This measure helps to reduce the lack of equality between rules for marketing domestic and imported ethanol, to reduce environment impacts -- as sugarcane ethanol has a better environment footprint than imported corn ethanol -- and to keep economic benefits to the entire ethanol industry in Brazil, which generates almost 1 million jobs."
