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A '180' on US biodiesel blend economics vs. Brazilian ethanol

By Ron Kotrba | January 18, 2013

After their Jan. 10 post on University of Illinois’ farmdoc daily website about Brazilian ethanol still having the economic advantage for blenders over U.S. biodiesel in fulfilling advanced biofuel requirements under the renewable fuel standard (RFS2), even after reinstatement of the $1 per gallon biodiesel tax credit, authors Scott Irwin and Darrel Good with the university’s agriculture and consumer economics department revisited the issue after receiving a number of comments pointing out omissions in their analysis, and suggestions for alternative analysis.

According to Good and Irwin, the comments they received pointed out that there is an Ad Valorem tax on Brazilian ethanol of 2.5 percent that adds to its cost; under the ethanol blend wall scenario, substitution of Brazilian ethanol for U.S. ethanol results in an “opportunity cost” to a blender in the form of lost profits on blending lower-priced domestic ethanol; and relative economics of the two products may vary by location in the U.S. Also, Good and Irwin note that prices of various fuels continue to change so there’s a continual need update analysis of blending economics.

“The price relationships at the U.S. Gulf on Jan. 10 favored biodiesel blending over the blending of Brazilian ethanol, even without consideration of the opportunity cost of Brazilian ethanol,” write Good and Irwin. “That cost added substantially to the advantage of biodiesel.”

Pertaining to location, they note the advantage of biodiesel over Brazilian ethanol at Chicago, for instance, would be further enhanced by the cost of shipping Brazilian ethanol to Chicago.

After the more complete analysis of blend economics, Good and Irwin conclude the data suggests an economic advantage to U.S. biodiesel over Brazilian ethanol in meeting the advanced biofuel requirements of RFS2.

“The biodiesel advantage is large and a dramatic change from our analysis last week,” they write. “It also has potentially far-reaching implications for both U.S. corn and domestic fats and oils consumption in 2013. For example, if Brazilian ethanol imports in 2013 are close to zero, rather than the 830 million gallons we forecast earlier, an additional 300 million bushels of U.S. corn could be consumed for ethanol and byproduct production. Similarly, if the entire RFS for advanced biofuels is met with biodiesel, biodiesel production would reach 1.83 billion gallons in 2013 (2.75 billion gallon RFS divided by 1.5) rather than the minimum of 1.28 gallons announced by the EPA for 2013. The additional 0.55 billion gallons would require an additional 4.18 billion pounds of biodiesel feedstock in 2013.”

Good and Irwin state that biodiesel prices would need to increase by at least 40 cents per gallon to negate all the cost advantages of biodiesel in meeting the advanced requirements in RFS2.

To read Good and Irwin’s complete Jan. 16 report, titled, “Domestic Biodiesel versus Brazilian Ethanol Revisited,” on the University of Illinois’ farmdoc daily website, click here.

 

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