The Economic Impact of Biofuel Trade Between the USA and Brazil

 The United States is the foremost producer of fuel ethanol and biodiesel, followed by Brazil in second place. In 2017, they jointly accounted for 84% of global ethanol production and 26% of biodiesel production. Both countries incorporate fuel ethanol and biodiesel with their fossil transport fuels. Furthermore, in Brazil, undiluted fuel ethanol immediately rivals gasoline at the fuel station. However, the differences in production costs for biofuels, gasoline, and diesel in different nations result in differing break-even oil prices for ethanol and biodiesel. Moreover, the activities taken by the government have a significant influence on the competitiveness of biofuels in both countries.

What are the determinants that impact the economic aspects of biofuel production in Brazil and the United States?Multiple factors impact the expenses, pricing, and profitability of biofuel manufacturing. The expense of raw materials is a significant determinant in calculating the manufacturing expenses of biofuels. In the United States, corn is the main raw material used for producing gasoline ethanol, while Brazil predominantly uses sugar cane for this purpose. Both nations predominantly employ soybeans for the manufacturing of biodiesel. The pricing of numerous agricultural commodities is determined by factors such as the area planted, crop yields, harvest conditions, and market dynamics. These factors are subject to periodic fluctuations. Production costs are influenced by the degree of technological sophistication of a manufacturing facility and the expenses associated with the fuels used for process energy.

Furthermore, the pricing of biofuel is impacted by other factors, including the prevailing prices of gasoline and diesel. These aspects are considered in order to maximize profit margins. The price of sugar cane ethanol in Brazil fluctuates based on the harvest cycle, with an increase observed during the inter-harvest period occurring from January to March.

To assess the profitability of biofuel production, it is imperative to consider the monetary worth of co-products. For example, when corn is used to make fuel ethanol, it results in dried distiller's grains (DDGs), but the production of biodiesel from soybeans produces soybean meal. Both of these animal feed components are quite valued and have a vital function in the economic aspect of biofuel production. Bagasse is a residual material that is produced when sugar cane is crushed in Brazil. It is employed as a fuel in sugar mill co-generation plants to fulfill the energy requirements of the facility. On certain occasions, it also produces surplus electricity that can be sold to other entities. The advancement of cellulosic ethanol in Brazil will result in an increased need for bagasse as a raw material for the production of advanced biofuels, hence augmenting its worth.

What is the degree of competition between biofuels and fossil-based transport fuels in both countries?

Most of the biofuel generated in Brazil and the United States is predominantly utilized for domestic consumption. While biofuel consumption is required in both countries, it is essential to prioritize its competitiveness with gasoline and diesel to reduce the costs associated with policy compliance. Over 70% of the gasoline-powered vehicle fleet in Brazil is comprised of flex-fuel vehicles. Consequently, undiluted ethanol must directly contend with gasoline at the fuel station.

To assess the relative competitiveness of biofuels compared to petroleum products, it is essential to compare the production costs of gasoline and diesel with those of ethanol and biodiesel. Gasoline and diesel production costs in the United States are lower than those in Brazil. The reason for this is the economies of scale provided by larger and more advanced refineries, the use of low-cost natural gas as a fuel in the refining process, and the optimization of the refinery's operations to generate greater amounts of transportation fuels. Brazil has a higher volume of gasoline and diesel imports compared to its exports. Nevertheless, this assessment does not incorporate an examination of the competitiveness of biofuels in relation to imported petroleum products.

The production costs of ethanol in Brazil are typically slightly greater than those in the United States. In 2017, this discrepancy equated to roughly 6-7%. The costs related to the distribution of fuel are similar in both countries. Nevertheless, as a result of the higher manufacturing expenses associated with gasoline in Brazil, fuel ethanol proves to be a more financially beneficial option when compared to the United States. The average production costs of biodiesel are often comparable in both countries because soybean oil is predominantly used as the main raw material.

The break-even oil price for biofuel production demonstrates that ethanol production in Brazil was economically feasible in comparison to domestic gasoline production, considering the crude oil prices fluctuating between USD 46/bbl and USD 64/bbl in 2017. Nevertheless, this was not the case in the United States. Both nations typically exhibit lower production expenses for ethanol in comparison to biodiesel. Both countries found that biodiesel could not effectively compete with fossil fuel due to the considerably higher costs of soybean oil feedstock, which were roughly three times the average crude oil prices in 2017.

The escalation of crude oil prices in 2017 led to a reduction in the supplementary expense of biofuels. The mean price of crude oil was roughly USD 51 per barrel for the initial six months of the year, and it rose to USD 57 per barrel in the latter half. This might be ascribed to the escalated costs of fertilizers and energy utilized in the producing process. In Brazil, the production of ethanol is not heavily influenced by the prices of fossil fuels because bagasse is used as a fuel source.