How competitive is biofuel production in Brazil and the United States?

Analysis from Renewables 2018

The United States ranks number one and Brazil ranks second as the largest producers of fuel ethanol and biodiesel. They accounted for 84% of global ethanol production between them in 2017, and 26% of biodiesel production. In both countries, fuel ethanol and biodiesel are blended with fossil transport fuels, and in Brazil unblended fuel ethanol also competes directly with gasoline at the pump. However, as production costs for biofuels, gasoline and diesel vary by country, the consequent difference in break-even oil price for ethanol and biodiesel, as well as policy measures, affect biofuel competitiveness in both countries.

Multiple factors affect biofuel production cost, pricing and profitability. Feedstock cost is a key determiner of biofuel production costs. For fuel ethanol, corn is the principal feedstock in the United States and Brazil mainly uses sugar cane, and both countries primarily use soybeans for biodiesel production. The prices of these agricultural commodities depend on planted area, yields and harvest conditions, as well as markets dynamics, all of which are subject to year-on-year fluctuations. A production facility’s technical sophistication and the price of fuels used for process energy also influence production costs.

Biofuel pricing is also determined by other factors: for instance, prices are often adjusted according to prevailing gasoline and diesel prices to maximise profit margin. In Brazil, the price of sugar cane ethanol fluctuates with the harvest cycle, rising during the January-March inter-harvest period.

To assess the profitability of biofuel production, the value of co-products must also be considered. For example, corn-based fuel ethanol manufacturing produces dried distiller’s grains (DDGs) while biodiesel production from soybeans results in soybean meal. Both are valuable animal feed products and are therefore important to biofuel production economics. In Brazil, bagasse is produced during sugar cane-crushing and is used as a fuel in sugar mill co-generation plants to satisfy onsite energy demand, and in some cases provides surplus electricity for export. Future production of cellulosic ethanol in Brazil would increase demand for bagasse as a feedstock for advanced biofuel production, consequently raising its value.

Most of the biofuel produced in Brazil and the United States is destined for domestic consumption. However, even though biofuel consumption is mandated in both countries, its competitiveness with gasoline and diesel remains important to minimise the cost of policy compliance. In Brazil, over 70% of the gasoline-fuelled vehicle fleet is composed of flex-fuel vehicles, so unblended hydrous ethanol must compete with gasoline at the pump.

To assess the relative competitiveness of biofuels with petroleum products, gasoline and diesel production costs must be compared with those of ethanol and biodiesel. Production costs for gasoline and diesel are lower in the United States than in Brazil, potentially explained by the economies of scale provided by larger and more sophisticated refineries, the use of low-cost natural gas as a process fuel, and optimisation of the refinery slate to produce higher volumes of transport fuels. Brazil is a net importer of both gasoline and diesel, but analysis of biofuel competitiveness with imported petroleum products is outside the scope of this evaluation.

Ethanol production costs are generally slightly higher in Brazil than the United States; in 2017, this difference was in the order of 6-7%. Fuel distribution costs are similar in both countries, but higher gasoline production costs in Brazil mean that fuel ethanol is more competitive than in the United States. Average biodiesel production costs are also broadly aligned because most production in both countries is based on soybean oil feedstock.

  Ethanol production cost (USD/Lge) Biodiesel production cost (USD/Lde) Ethanol break-even (USD/bbl) Biodiesel break-even (USD/bbl)
Brazil 0.54 - 0.62 0.73 - 0.98 50 - 60 81 - 120
United States 0.51 - 0.58 0.76 - 0.86 64 - 76 104 - 120

Notes: Lge = litre of gasoline equivalent; Lde = litre of diesel equivalent; bbl = barrel. Biofuel production costs have been adjusted to account for the higher calorific values of gasoline and diesel. In 2017, energy-adjusted production costs for ethanol in Brazil were equal to domestically produced gasoline on average, compared with an ethanol premium of USD 0.15/L in the United States. In Brazil the biodiesel premium was USD 0.26/L above fossil-based diesel production on average, smaller than in the United States, where the premium was USD 0.37/L in 2017. Production costs exclude taxes. Sources: F.O. Lichts (2018), F.O. Lichts Interactive Data (database), www.agra-net.com; ANP (2018), “Producer prices”, www.anp.gov.br; US EIA (2018), Petroleum and Other Liquids (database), www.eia.gov.

The break-even oil price for biofuel production reveals that, at 2017 crude oil prices of between USD 46/bbl and USD 64/bbl, ethanol production in Brazil was generally competitive with domestic gasoline production, but this was not the case in the United States. The cost of ethanol production in both countries is generally lower than for biodiesel, which was not competitive with fossil diesel in either country because, on a volume basis, soybean oil feedstock costs were almost three times higher than average crude oil prices in 2017.

Increasing crude oil prices in 2017 reduced biofuel cost premiums: the average crude oil price in the first half of 2017 was around USD 51/bbl, and it rose to USD 57/bbl for the second half of the year, raising biofuel competitiveness in Brazil and reducing the biodiesel premium over diesel by 30%. The effect in the United States, however, was minimal because although higher oil prices raised the cost of gasoline and diesel, biofuel production costs also increased slightly. This could be explained by higher fertiliser and process energy costs. In Brazil, ethanol production is decoupled more from fossil fuel prices because bagasse is used for fuel.

Biofuel and fossil-based transport fuel production cost comparison, 2017

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Rising crude oil prices in the first half of 2018 may have made fuel ethanol production in the United States more competitive. However, corn feedstock prices exhibit close correlation with crude oil prices, potentially raising the break-even price to above the range shown in Table 5.2 and dampening the effect of higher gasoline prices on US ethanol competitiveness. The break-even price for biodiesel in both Brazil and the United States remains higher than crude oil prices.

In the United States, policy support strengthens the economic case for biofuel consumption. In 2017 the average cost of domestically produced biodiesel was between USD 0.76/L and USD 0.86/Lde (F.O. Lichts, 2017). However, eligibility for compliance credits under the Renewable Fuel Standard (RFS2), with an average value of USD 0.27/L in 2017, combined with the availability of a blender’s tax credit of USD 1/gallon (USD 0.26/L), reduced the refiners’ cost of biodiesel blending to below the cost of fossil diesel.

Fuel ethanol is also eligible for RFS2 compliance credits, worth USD 0.18/L on average in 2017, but not a blender’s tax credit. Including the value of DDG and the RIN credits, the profitability of US corn ethanol output was between USD 0.05/L and USD 0.32/L in 2017. For biofuels consumed in California, credits from the Low-Carbon Fuel Standard (LCFS) provide additional income.

In Brazil, introduction of the RenovaBio programme will require fuel distributors to obtain emissions reductions certificates. This is anticipated to provide a financial stimulus for ethanol and biodiesel production, as well as for the development of advanced biofuels.

Fuel taxation levels also influence price competitiveness at the pump, and hence consumer choices. This is most relevant in Brazil, where gasoline and ethanol compete directly for market shares: as of March 2018, state and federal taxation made up 46% of final gasoline costs (Petrobras, 2018). Ethanol currently benefits from preferential federal taxation rates as well as lower state taxation in some cases, and when taxation on both fuels was raised in 2017, that of gasoline increased more. These changes to fuel taxation, combined with higher crude oil prices, resulted in a 25% increase in hydrous ethanol consumption in the second half of the year. Overall, ethanol accounted for 44% of Brazil’s gasoline-pool fuel demand in 2017 (UNICA, 2018).