Demand for ethanol in major consuming countries has risen rapidly. According to the International Energy Agency, world ethanol use increased by nearly 300 percent between 2000 and 2010, with consumption reaching over 104 billion liters. Global ethanol trade nearly doubled during the same period, but at 5.9 billion liters in 2010, world trade is still a small share of total use. World demand for ethanol is expected to continue to increase in response to anticipated economic growth, rising oil prices, and the mandates in many countries to replace fossil fuel use with renewable energy sources. Brazil is in a good position to satisfy demand: sugarcane-based ethanol is one of the most efficient sources of biofuel per hectare, with a yield in liters of ethanol per hectare that is almost double that of corn-based ethanol, according to USDA.

The U.S. and the European Union (EU) are two of the major consuming markets for Brazilian ethanol. The U.S. Energy Independence and Security Act (EISA) of 2007 requires transportation fuel producers to use at least 136 billion liters of biofuels by 2022. The Renewable Fuel Standard (RFS) provision established under EISA mandates minimum use of 57 billion liters of corn-based ethanol by 2015, up from about 49 billion liters in 2010. The RFS also requires the use of at least 80 billion liters of cellulosic and advanced biofuels (which includes ethanol from sugarcane and biodiesel) by 2022. The 54-cent per-gallon surcharge on imported ethanol is scheduled to expire at the end of 2011. If this happens, it may stimulate U.S. imports of Brazilian ethanol.

The EU’s Renewable Energy Directive sets a mandatory minimum share of renewable energy in total fuel consumption in the transport sector of 10 percent per member state by 2020. While biodiesel is the principal biofuel used in Europe, the European Commission estimates that its ethanol consumption could rise from less than 5 billion liters in 2010 to about 10 billion liters by 2020. Several other importing countries, including Japan, have energy mandates that encourage the use of agriculture-based ethanol in their transportation sectors.

Brazil’s Ability To Expand Ethanol Exports Uncertain

Global ethanol production, concentrated in only a few producing countries, may not keep pace with rapidly growing demand. Concerns about food and fuel tradeoffs may limit some countries’ ability to increase ethanol production, particularly production of ethanol from grains. Based on USDA long-term projections, Brazil’s ethanol production is expected to rise 45 percent during the coming decade to 43.8 billion liters by 2020. However, Brazil’s ability to provide the bulk of the world’s import needs will depend on its domestic ethanol demand, world sugar and oil prices, Brazil’s currency exchange rate, and the capacity of its infrastructure to move ethanol to ports.

Growing domestic demand is certain to put pressure on Brazil’s export supply. Brazil is the world’s second largest ethanol consumer, behind the United States, and accounts for over 30 percent of global ethanol consumption. Brazil’s domestic de­mand is projected to grow as sales of flex-fuel cars rise with increased income.

The world price of sugar is an important determinant of Brazilian ethanol supply. When the sugar price is high, more sugarcane is used for sugar; lower sugar prices favor conversion of sugarcane to ethanol. In 2009-10, drought in Brazil led to a smaller sugarcane harvest, declining stocks, and higher sugar import demand in major consuming countries such as India, China, and Pakistan. With higher international sugar prices, a larger share of the Brazilian sugarcane crop was allocated to sugar production. In late 2010, when the world sugar price fell to under 14 cents per pound from a 29-year high of 30 cents per pound earlier that year, the share of sugarcane used for ethanol rebounded.

Although the ethanol blend requirement tends to insulate Brazil’s domestic ethanol prices from fluctuations in world oil prices, changes in the world price of oil affect the ethanol/gasoline price relationship in Brazil. When oil prices fall, ethanol demand weakens. Conversely, higher world oil prices encourage increased use of ethanol in Brazil’s rapidly expanding fleet of flex-fuel vehicles.

Both real (adjusted for inflation) and nominal exchange rates have enormous effects on Brazil’s international competitiveness, export volumes, farm earnings, and processing margins for distilleries and sugar-ethanol processing mills. Brazil’s currency, the real, appreciated in 2009, making Brazil’s ethanol exports more expensive and reducing the competitiveness of Brazil’s ethanol in the world market. Brazil’s ethanol exports slipped to 3.3 billion liters in 2009 and to 1.9 billion liters in 2010.