U.S. ethanol producers seek to avert trade war

CHICAGO/SA O PAULO• President Donald Trump’s America First rhetoric is doing no favours for U.S. ethanol producers, who are hoping to avoid a trade fight with fuel buyers in Brazil.

The administration has started making noise about rising imports of Brazilian biofuel made from sugar. That’s got the South American producer mulling tariffs or a quota on imports of U.S. fuel made from corn. A trade spat would be a much bigger problem up north because the U.S. ships more than four times as much to Brazil than it buys from the country.

The brewing trade dispute is gearing up to pit the world’s two biggest ethanol producers against each other. As the rivalry heats up, hedge funds seem to be signalling that Brazil will be the winner — speculators cut their bullish bets on corn last week while getting less bearish on sugar.

“The winds of protectionism are blowing in Washington,” said Joel Velasco, a principal at Albright Stonebridge Group in Washington and a former representative for the Brazilian Sugarcane Industry Association, or Unica. “The race to raise barriers can quickly sour things for U.S. and Brazil relations .”

Raw- sugar futures have risen as much as 8 per cent since the end of June, buoyed by the outlook for increased use in ethanol. Gains for crude oil have spurred Brazil’s state- controlled oil company, Petroleo Brasileiro SA, to raise gasoline prices, boosting the allure of ethanol, which competes directly at the pump in a country where most cars can use either fuel. A recent fuel- tax hike is also favouring use of the biofuel.

The tension escalated last month, when the U.S. Environmental Protection Agency, in proposing annual renewable- fuel quotas, asked for public comments addressing the agency’s concerns that Brazilian ethanol is being used to satisfy parts of the country’s biofuel mandate.

Both countries have long imported from each other, with demand fluctuating along with corn and sugar price differentials.

While Brazil also depends on its shipments to the U.S ., its No. 1 customer, its industry as a whole is not as reliant on exports because of a robust domestic market, making a trade dispute more of an issue for the American producers. The U. S.’s capacity exceeds its current domestic demand.

It’s also bad timing for U.S. producers who already lost a mammoth customer in China after the nation raised tariffs on American ethanol and an animal feed byproduct. While the American industry wrote a Feb. 7 letter to Trump asking him to intervene, those issues were absent in a May announcement that the U.S. reached an agreement with China on commodities, including beef.