Despite a 20 percent tariff rate quota implemented in 2017, Brazil has continued to purchase significant amounts of ethanol from the U.S. It was the top export destination in the 2017-&rsquo;18 marketing year&mdash;September to August&mdash;at 464.9 million gallons, according to the U.S. Grains Council. From that standpoint, the figures look great and the TRQ&mdash;20 percent on imports above 600,000 liters annually&mdash;doesn&rsquo;t seem to have a significant effect. But with demand figured in, the stats look much different. &ldquo;I used to think, &lsquo;How bad could it be?&rsquo;&rdquo; says Mike Dwyer, chief economist for the U.S. Grains Council. &ldquo;But that&rsquo;s not right. Because in the past year in Brazil, the price of oil went up, domestic consumption soared and we got none of it.&rdquo; The impact is about $1 billion, he adds. &ldquo;The fact that we got none of their surging market, to me, is a loss. We could have doubled our exports in the past year.&rdquo; The U.S. has missed out on unprecedented surging demand in Brazil, and has been effectively shut out of the Chinese market as a result of standard and retaliatory tariffs amounting to 70 percent. Before the tariffs, the two countries represented enormous export opportunities, but new markets are popping up and U.S. ethanol still is finding homes around the globe, despite its current tariff battles. To Brazil The steady exports to Brazil are evident in recent figures. &ldquo;Today, it pencils out,&rdquo; says Craig Willis, senior vice president of global markets for Growth Energy. &ldquo;It might not tomorrow. We&rsquo;re always at risk of market dynamics changing and working against us. &ldquo;In spite of tariffs, we&rsquo;re sending record amounts of volume right now into Brazil,&rdquo; Willis says. &ldquo;We&rsquo;re pretty certain, by (calendar) year&rsquo;s end, we&rsquo;re going to have a record export year to Brazil.&rdquo; Willis says exports to Brazil by the end of calendar year 2018 are expected to reach 550 million gallons. Exports to the country in calendar year 2017 totaled 445 million gallons. Willis attributes that record to the high oil prices that Dwyer says have created more opportunities the U.S. can&rsquo;t take advantage of. Brian Jennings, CEO of the American Coalition for Ethanol, says while figures look good, the U.S. absolutely has missed opportunities in Brazil because of the TRQ. The tariff is in place because sugar producers have been effective in convincing the government to prop them up, he says. There&rsquo;s no real justification for it, he adds. &ldquo;The TRQ has to go.&rdquo; Jennings and Dwyer say the expectation is that the TRQ will maintain only its current two-year shelf life, and phase out when Brazil implements its renewables policy, RenovaBio. The program aims to reduce the country&rsquo;s greenhouse gas emissions by 37 percent by 2025 and 43 percent by 2030. The rules are currently being drafted. Brazil has not indicated whether the TRQ life will be extended. &ldquo;If RenovaBio has a carbon penalty, and then on top of that you have a TRQ of up to 20 percent, you&rsquo;re dealing with compound tariffs,&rdquo; Dwyer says. &ldquo;So what we&rsquo;ve made clear to Brazil is that we would really love to keep the cooperation going, but it&rsquo;s very important to us that these two not simultaneously exist. The TRQ should fade into history, as RenovaBio is part of their future.&rdquo; Dwyer adds that he hopes RenovaBio is a real environmental policy, not a disguised trade policy. The TRQ itself is a repudiation of a 2011 agreement between the U.S. and Brazil that neither would impose tariffs on the other, he says. &ldquo;We&rsquo;re still friends with them. We&rsquo;re cooperating with them on many, many levels, but this will remain forever a problem. Why? Because we agreed the global market is best done without the use of tariffs.&rdquo; To China In China, the tariffs have essentially killed imports directly from the U.S. &ldquo;Exports to China have dropped off a cliff,&rdquo; Willis says. In January, China raised its 5 percent tariff to 30 percent. In April, it increased to 45 percent in the midst of the trade war, and again in July, bringing the total to 70 percent. &ldquo;We have a tariff in place that is prohibitive to U.S. ethanol working in there, and it&rsquo;s shut things off,&rdquo; Willis says. In February of 2018, China purchased about 33 million gallons of U.S. ethanol, and 19.8 million in March, according to the U.S. Energy Information Administration. Through July, the most recent figures available at press time, the total each month is zero. Like Brazil, China also has a renewables policy moving into place, aiming for a nationwide E10 blend by 2020. &ldquo;An enormous demand for ethanol would be created as a result of that,&rdquo; Jennings says, adding that the figure would be north of 5 billion gallons. While China is trying to boost domestic ethanol production, it can&rsquo;t meet that ambitious goal without imports, Jennings and Dwyer agree. &ldquo;They&rsquo;re going to enforce their mandate like we do with the Renewable Fuel Standard,&rdquo; Dwyer says. &ldquo;The secret sauce in ethanol mandates is enforcement. If you don&rsquo;t enforce, all you have is an aspirational goal that won&rsquo;t drive investment.&rdquo; USGC staff spent time in China, helping train relevant parties and develop markets, he says. &ldquo;We had it all tied up perfectly in China. We wanted E10, we got it. Unfortunately, now that they&rsquo;re going to need imports, we&rsquo;re a 70 percent duty because of the tit for tat trade tariffs that are part of the retaliation list. &hellip; As good as we are, it&rsquo;s tough to be competitive in that market.&rdquo; Dwyer says the hope is that a solution will be negotiated to calm the escalated trade war between the Trump administration and China. &ldquo;I can&rsquo;t believe it would be permanent policy to have these tariffs in place. It doesn&rsquo;t behoove anybody.&rdquo; Jennings says, &ldquo;China was a very promising, very large opportunity for us. As the lowest-cost producer, China turned to the U.S. Our exports in 2017 reflected that optimism.&rdquo; Despite the steep drop-off earlier this year, U.S. Grains Council figures show exports to China in the 2017-&rsquo;18 marketing year (September through August) increased by more than 100 percent, totaling 99.85 million gallons, up from about 49 million the year before. The path forward will depend on how and if countries walk back from this trade dispute, he says. &ldquo;I think no one is smart enough to know what will happen. We&rsquo;re in uncharted territory, in some respects, with regard to the way the U.S. is handling trade policy.&rdquo; Rules that applied in the past might not apply now and into the future, he adds. But Jennings says China likely understands the value of U.S. ethanol, including its emissions benefits. &ldquo;China is really desperate to clean up their smog and their air pollution.&rdquo; Dwyer says the USGC would like to work with China to reduce the initial 30 percent tariff when the retaliatory penalties are removed. &ldquo;But even if we fail at that and they leave it at 30 percent, the U.S. price is so competitive that we would be competitive in China. &ldquo;And you&rsquo;ll start to fully appreciate the market development strategy we&rsquo;ve deployed in China,&rdquo; Dwyer says. &ldquo;I think China is going to be our biggest market.&rdquo; For Producers &ldquo;The most important thing to ethanol producers today is they have access to markets, that there is demand,&rdquo; Jennings says. &ldquo;And we have some challenges to market access, both here and abroad. &ldquo;The fact that we can&rsquo;t yet sell E15 year-round hurts. The fact that the Chinese market was effectively open last year and effectively closed this year contributes to that problem. All of these things factor in when it comes to the demand equation and keeping these plants running.&rdquo; President Donald Trump announced in October that the U.S. would allow E15 sales year-round, removing the Reid vapor pressure restriction between June 1 and Sept. 15. The process, however, is uncertain and the U.S. EPA later announced the rule-making would include unspecified changes to the renewable identification number compliance system. Corn prices have recently ticked up a bit and ethanol prices have fallen. &ldquo;Ethanol plants are in an incredibly rough patch right now when it comes to making money,&rdquo; Jennings says. In fact, many plants aren&rsquo;t making money currently. Jennings points out that the U.S. ethanol industry has added more than 1 billion gallons of capacity. &ldquo;We have the ability to produce a lot more than we&rsquo;re using right now.&rdquo; Dwyer says, &ldquo;We&rsquo;re disappointed because two markets we were looking forward to with big-gallon impacts on our industry have been precluded by policy action. And that&rsquo;s sad because we have a great product and the world recognizes that, but in the two markets that could be game changers for us, we&rsquo;re facing market problems, unprecedented in the case of China.&rdquo; To the World Meanwhile, the low-cost, high-octane and environmental benefits of U.S. ethanol have been attractive to different markets around the world. While about $370 million of sales to China were lost as of mid-October, that ethanol simply was rerouted, Dwyer says. &ldquo;Not only did it find a home, our exports were 1.62 billion gallons, up 19 percent from the previous year and a big-time new record,&rdquo; Dwyer says, referring to the 2017-&rsquo;18 marketing year. &ldquo;Our product is so competitive, any product lost in China has a home elsewhere.&rdquo; The Middle East purchases U.S. ethanol to blend and sell to Africa, he cites, not because of environmental benefits, but because it&rsquo;s the economical solution. The United Arab Emirates was the third-largest destination in August this year. &ldquo;Even without a mandate, it just lowers the price,&rdquo; Dwyer says. &ldquo;We&rsquo;re starting to see markets pop up that are not traditional markets and they&rsquo;re just doing it because the octane of ethanol, at 115, is the cheapest octane on the planet,&rdquo; he adds. The benefits are creating opportunities in Indonesia, as well. &ldquo;This is resonating everywhere. We can lower your bills. With U.S. ethanol, a social benefit comes with a discount.&rdquo; Canada also represents a reliable market, sitting on the list as the second-largest export destination at 336.91 million gallons in the 2017-&rsquo;18 marketing year. It&rsquo;s overlooked because of that reliability and proximity, Jennings speculates. &ldquo;Year in, year out, Canada is among the top, sometimes the top, customer for ethanol.&rdquo; And the Mexican market is ramping up, as the country has approved gas stations to start selling E10 everywhere except in Mexico City, Monterrey and Guadalajara. &ldquo;Mexico is embarking on a new era and freeing up the marketplace,&rdquo; Jennings says, adding that even without the three major cities, the market represents a billion gallons of ethanol demand. The country&rsquo;s gasoline demand is 12 billion gallons, Willis says. &ldquo;No doubt, Mexico is a priority of ours to try to open up.&rdquo; Currently, the country&rsquo;s primary source of octane is MTBE, two-thirds of which is already coming from the U.S. And Mexico currently has no tariffs blocking the market. Mexico and the U.S. are working to &ldquo;cross t&rsquo;s and dot i&rsquo;s&rdquo; to open that market, Willis says. Taxes, logistics and permitting are being polished. &ldquo;Any day now, I think you&rsquo;re going to start to see ethanol going into that country.&rdquo; India was the third-largest export destination in the 2017-&rsquo;18 marketing year, at 165.76 million gallons. It&rsquo;s one of the top eight gasoline markets in the world, and one of the fastest growing. The country is a top priority for an export market, Willis says. The industry&rsquo;s six priority export countries are: China, Mexico, Brazil, India, Japan and Canada, he says. They represent 32 percent of global gasoline demand. Worldwide, 7.8 percent of all gasoline is ethanol, Willis says. Brazil and the U.S. are doing most of the heavy lifting to get to that figure, and if removed, the global blend is 3.2 percent. &ldquo;We have a huge opportunity out there,&rdquo; Willis says. &nbsp; Author: Lisa Gibson Editor, Ethanol Producer Magazine 701.738.4920 lgibson@bbiinternational.com

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TALK TARIFFS: This photo of a Brazilian ethanol plant was taken during a trip to Brazil during which the American Coalition for Ethanol, the U.S. Grains Council and the U.S. Department of Agriculture tried to convey to officials how harmful the tarif

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FROM THE DECEMBER ISSUE: Tariffs in China and Brazil have deeply affected U.S. ethanol exports, but other markets remain, new ones are opening and opportunities still abound for the world's lowest-cost octane. 

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