Got Ethanol?

By Hannah Wallace October 31, 2008

Florida is among the U.S. states most dependent on increasingly iffy energy imports. So it seemed like a great idea when state officials began to promote ethanol as a homegrown alternative that would increase energy security, while cleaning up the air and boosting agriculture along the way.

In 2006, then-Gov. Jeb Bush signed an energy bill that provides $7.5 million in corporate income tax incentives for four years to companies that make and distribute biofuels. The limit is $1 million in tax refunds for each company per fiscal year.

This summer, the state of Florida mandated that all gasoline sold here get mixed with 10 percent ethanol by 2010. Under Gov. Charlie Crist, Florida has pumped more than $50 million of taxpayer funds into ethanol research and development through programs such as Farm to Fuel. Backing up the state’s efforts, the feds spread a total of $150 million in cellulosic ethanol research grants in 2007.

But after two years of high-flying ethanol rhetoric in Florida, reality is forcing a soft landing. While the stated political intent is to promote local production, Sarasota and Bradenton residents won’t be seeing any refineries going up in the agricultural backyards of their counties anytime soon. All the E10 at local pumps will come by tanker truck from fuel blenders at the Port of Tampa, who in turn get their ethanol from the Midwest, Brazil and the Caribbean.

While the government is gung-ho about ethanol production in Florida, the private sector isn’t. By far most big agriculture and food processing companies—crucial for the success of Florida’s ethanol production ideas—are keeping ethanol at arm’s length.

As recently as last year, it looked as if the state’s energy independence dreams were coming closer to reality when Alico Inc., the 500-pound gorilla in Southwest Florida agribusiness, announced it was selected to receive millions of dollars of federal and state grants to build a cellulosic ethanol refinery.

Most of Florida’s homegrown ethanol hopes rest on cellulosic ethanol, also tagged as “second-generation” ethanol, which could be made of abundant and cheap feedstock such as sucked-out sugarcane (also known as bagasse), switchgrass, citrus peel, mulch or grass clippings.

But in June, Alico pulled the plug and said it would not pursue the grants.

“The risks associated [with a cellulosic ethanol refinery] outweighed any reasonably anticipated benefits,” Alico Chairman John R. Alexander said in a terse statement.

That’s partly because of the experimental nature of the fuel. Optimists insist that a biotech breakthrough and sustainable cellulosic ethanol production are just half a decade away. But skeptics believe it won’t happen before 20 years, if at all.

Another reason is that ethanol has become a victim of its own success in the United States. Biofuels are gobbling up farmland at a fast rate, and that has triggered food price inflation (see The Corn Crunch, page XX), which, in turn, draws potential ethanol feedstock suppliers back to food production.

Take Bradenton-based Tropicana. The state’s largest citrus consumer continues to process its leftover citrus peel into cattle feed pellets for Europe, where they yield higher prices than ever.

And then there’s sugarcane, the feedstock that Brazil has used sustainably and profitably for more than two decades to produce ethanol on a mega-scale. But the most efficient raw material available in the Sunshine State is, well, unavailable. Florida Crystals and U.S. Sugar, the state’s two sugar giants, don’t see any reason to convert their sugar mills into ethanol refineries as long as federal subsidies prop up the sugar price. What’s more, U.S. Sugar just signed a going-out-of-business sale with the state of Florida as part of the Everglades restoration effort.

In the meantime, the next best private-sector idea was to import corn from the Midwest and process it into ethanol at Florida refineries. But that idea didn’t fly, either.

In 2006, Tampa-based startup US EnviroFuels announced it would build two corn ethanol refineries, one at Port Manatee and one at the Port of Tampa. Then-Gov. Jeb Bush even participated in a groundbreaking ceremony for what was going to be US EnviroFuels’ Tampa refinery. Two years later, the Port Manatee refinery plan is dead, and the company has sold its Tampa property to a Dallas firm that says it wants to build a biodiesel storage facility/refinery.

Bradley Krohn, founder and president of US EnviroFuels, insists he will still build an ethanol refinery—this time in Highland County, far away from the big sugar mills—that would process locally grown sugarcane and sweet sorghum.

But the big private-sector investments pouring into ethanol in the state have nothing to do with production. They’re all about imports.

Jacksonville-based Gate Petroleum Co. showed the way. Last year, the petroleum distributor shelved plans to build a corn-fed ethanol plant in north Florida. Instead, Gate is investing $90 million into construction of an ethanol storage facility at the Port of Jacksonville, to be completed by 2010.

The investments in ethanol storage are based on a simple calculation. At the current gasoline consumption in Florida, the state’s E10 mandate would translate into a need of 861 million gallons of ethanol a year when the law kicks in—that’s some $2.4 billion worth of sales. Just Orlando, the nation’s third-largest gasoline market, will need 225 million gallons of ethanol per year. Sarasota-Bradenton and Fort Myers-Cape Coral should consume some 30 million gallons each per year.

No wonder petroleum distributors are acting quickly.

“There’s been plenty of investment in Tampa, Jacksonville, most of the major ports in Florida,” says Bob Starkey, vice president of fuels at Houston consulting firm Jim Jordan & Associates. “They’ve already turned the switch [in Florida], the majors are all blending E10 in the state.”

And, thanks to the Midwest ethanol troubles, a fast-rising amount of the fuel is coming from abroad (see The Brazilian Option).

 “We’re definitely going to see an increase in ethanol imports,” says Benoit Wirz of Miami consulting firm US Global LLC. “There’s a Florida mandate, but there’s no near-term source of ethanol in Florida.”

So the “smart money,” as Wirz puts it, bets that for a decade or two, the biggest and safest profits are to be made in serving tankers and barges shipping hundreds of millions of gallons of ethanol to Florida ports and bringing the fuel to gas stations.

Most of the “smart money,” in this case, comes from the world’s oil capital, Houston.

The following ethanol infrastructure projects are pending in the Tampa Bay area:

•Houston-based BioUrja Trading LLC has an ethanol storage facility at the Port of Tampa on the drawing boards. Permitting is “moving slow,” and the company is negotiating with CSX Corp. over a rail connection, the company says.

•U.S. Development Group LLC, a Houston-based ethanol distribution company, is reportedly planning a storage facility at the Port of Tampa.

•Kinder Morgan Energy Partners LP, also from Houston, in March began retrofitting a 106-mile gasoline pipeline from Tampa to Orlando International Airport, converting it into the nation’s first trans-market ethanol pipeline. The company expects ethanol to be flowing to the United States’ third-largest gasoline market this fall through the pioneering pipeline. Kinder Morgan already operates a 3 million-gallon ethanol storage facility at the Port of Tampa. If the pipeline works—shipping ethanol through pipes and pumps requires complex prepping—it could trigger similar projects elsewhere in the country, taking a chunk of cost out of transporting ethanol.

Closer to home, the Port Manatee operations of TransMontaigne, a Denver-based petroleum distributor, recently began receiving smaller quantities of biofuels. According to Steve Tyndal, director of trade development, Port Manatee is also talking with a potential tenant that could include biofuels in its product mix.

Even though direct imports from Brazil, the globe’s ethanol powerhouse, are hampered by a 54-cents-a-gallon tariff, the rising troubles of Midwest producers are helping foreign ethanol suppliers. As of May 2008, U.S. ethanol imports were at an equivalent of 530 million gallons for the year (see tables). That’s a small share of the 9.6 billion gallons U.S. producers cranked out. But it’s still near the previous import record of 2006, when a phase-out of another oxygenate pushed U.S. ethanol prices to $6 a gallon.

Some coastal U.S. markets can import Brazilian ethanol at a lower cost than bringing it by barge or rail from the Midwest, an import-critical study in 2005 stated.

“When U.S. ethanol prices rise, it can be economical to ship Brazilian ethanol produced at 60 cents a gallon, and pay the 54-cents a gallon tariff into the U.S.,” said the study by the Minneapolis-based Institute for Agriculture and Trade Policy.

Brazilian imports are likely to increase. The Brazilian government just issued a study that predicts a 72-percent growth of ethanol exports by 2011, to 422 million gallons. If most of it ends up in the United States, which is likely, that could be more than 10 percent of total U.S. consumption. Mexico is investing $90 million into producing biofuels as well, much of it from sugarcane that will be produced just across the Gulf from Tampa. Given geography and NAFTA, it's likely at least some of this ethanol will end up in Florida.

While the governors of Texas and New Jersey petitioned the federal government earlier this year to relax the ethanol consumption targets of the Renewable Fuel Standard set in 2007, Florida is going a different way. To the chagrin of Midwest ethanol boosters and environmentalists, Gov. Charlie Crist, during a trip to Brazil early this year, said he wants to make Florida a gateway for Brazilian ethanol imports. And his predecessor, Jeb Bush, is already blasting a political path towards that goal (see The Bush-Brazil Connection).

The Bush-Brazil Connection

In the last months of his tenure as governor in 2006, Jeb Bush played a central role in one of the few policy successes in Latin America of the George W. Bush Administration.

While the official ethanol rhetoric in Washington focused on energy independence and domestic production, Jeb pushed the U.S.-Brazil Ethanol Agreement. With it, the former governor wanted to achieve something far less popular these days: to “fuel the economic engine of free trade.”

In late 2005, Jeb joined forces with Brazil’s agribusiness elite and people close to his brother’s administration as well as from the Interamerican Development Bank in setting up the Interamerican Ethanol Commission (recently renamed the International Biofuels Commission). The Coral Gables-based group has since quietly and forcefully pushed international ethanol trade.

“What is necessary is an aggressive marketing campaign to change the perception of biofuels as solely ‘home-grown’ energy, promote the liberalization of trade, the proliferation of producers and consumers, and the development of mechanisms of that trade: international standards and liquid futures markets,” the organization said in a study.

In a 2006 position paper, the younger Bush laid out a “hemispheric-wide approach” to ethanol. In the “15 by 15” plan, Jeb recommended an energy policy under which the United States would boost ethanol consumption to 15 billion gallons by 2015 (something later adopted by federal legislation). This would be achieved in close and comprehensive cooperation with Brazil.

Following up words with deeds, Jeb promoted and, in 2006, achieved an ethanol partnership between the states of Florida and São Paulo, a nucleus of the bigger agreement to come.

Jeb’s efforts paid off with the U.S.-Brazil Ethanol Agreement, signed in March 2007 by George W. Bush and President Luiz Inácio “Lula” da Silva.

Two months before the signing of the U.S.-Brazil ethanol agreement, the energy secretary of the Bush Administration began advocating a lifting of the 54-cents a gallon ethanol duty the United States imposes on imports. So far, the Bush Administration has failed to convince Congress.

The Corn Crunch

Nearly all U.S. ethanol is produced with corn. And that has become a problem as record corn prices and soft ethanol prices have squeezed U.S. ethanol producers recently, to the point where a dozen have sought bankruptcy protection.

As the Rapid City Journal of South Dakota put it in an August editorial: Corn ethanol has become “a victim of its own success.”

The high corn price, if you believe corn ethanol skeptics, won’t go away as long as ambitious ethanol consumption targets sustain land scarcity.

“Land availability is and will remain the critical factor for agriculturally derived fuels,” a study by the Interamerican Development Bank said in 2007.

And in that regard, corn doesn’t look good. Even the free-market World Bank in a recent study blamed up to 75 percent of food price rises directly on biofuels. With corn as the main ethanol feedstock, the United States, critics point out, would have to dedicate 20 percent of its arable land to biofuels if it were to meet a 2007 federal law’s consumption targets with domestic production.

“Nationwide the debate has shifted from energy independence to ‘food versus fuel’ and, watching gas prices rise right along with those at the grocery store, it’s a nearly impossible debate for the ethanol industry to win,” the Rapid City Journal said in its editorial.

Whether Florida’s imports will come from the Midwest or from abroad depends, in the long term, on the corn versus the sugar price, says Benoit Wirz of Miami consulting firm US Global LLC. If the corn price goes down, U.S. ethanol would be very attractive, he says.

But so far, there’s no sign of relief for Midwest producers. The corn futures price at the Chicago Board of Trade peaked in July at a record $750 a bushel. It dropped somewhat in August, but remained near record levels.

The sugar price also shot up, from $316 per ton at the close of last year, to $400 in August, but not as much as corn.

Not surprisingly, corn ethanol interests are now beginning to cautiously advocate a relaxing of consumption targets. The newspaper from the corn ethanol heartland, for that matter, in August called the 2007 law’s targets “not only unrealistic but impossible” to attain.

U.S. Ethanol Imports (million gallons per year)

Year                 mm gallons       share of U.S. consumption

2002                45.5                             n.a.

2003                60.9                             n.a.

2004                159.9                           n.a.

2005                109.8                           4%

2006                539.71                         13%

2007                323.9                           6%

2008*              530                              n.a.

SOURCE: USITC, US Energy Information Administration, Jordan & Associates

*Extrapolated from import data through May

Florida Ethanol Imports, by buyer (2006-2008)

Year     Buying Company                      Port                              Mln. Gallons     Origin

2006    Chevron USA Inc.                    Everglades                    1.395               Argentina

2007    Chevron USA Inc.                    Jacksonville                  2.325               Brazil

2008    Shell US Trading Co.                Everglades                    13.392             El Salvador, Jamaica

            Morgan Stanley                        Tampa                          2.945               Brazil

            Morgan Stanley                        Everglades                    8.556               Brazil

            Morgan Stanley                        Canaveral                     0.4                   Brazil

            Flint Hills Resources                 Tampa                          2.387               Trinidad & Tobago

            Vertical North America Tampa                          2.015               Brazil

SOURCE: Jordan & Associates

Florida Ethanol Imports, by port (2006-2008, mln gallons)

Year                 Total                Everglades        Tampa  Jacksonville                  Canaveral

2006                1.395               1.395               0                      0                                  0

2007                2.325               0                      0                      2.325                           0

2008                29.695 21.948 7.347               0                          0.4  

Source: Jordan & Associates

Editor’s Note: For additional information on future of Brazilian ethanol, read our online version at

The Brazilian Option

At the current state of science, sugarcane is the most efficient ethanol feedstock. The main reason for this is that sugar-rich Brazil began massively promoting the use of ethanol in cars after the oil crisis of the 1970s.

Until the United States’ ethanol program kicked into gear a couple of years ago, Brazil was the biggest ethanol producer on the globe. As Brazilian ethanol production costs are half of those of the corn-based Midwest competition, the South American country continues to be the by far biggest ethanol exporter, originating half of all ethanol traded internationally. Brazilian exports rose from $54 million in 1997 to $1.6 billion in 2006.

Now, the country is intent on expanding even more its ethanol shipments.

Brazil wants to add 77 new distilleries to its existing 360 units by 2010. “The objective of the Brazilian government is to make ethanol a major international commodity together with other countries,” the Brazilian agroenergy ministry said in a recent presentation.

Brazil’s sugarcane area expanded from 4.88 million hectares in 2001 to 6.16 million hectares in 2007, mainly due to ethanol. Ethanol production per hectare rose from 523,000 liters to 600,000 liters in the same period.

The export infrastructure is growing accordingly. In 2005, Cargill, in a joint venture with Brazil’s Crystalsev, built the world’s first ethanol-only terminal at the port of Santos. Brazil is now in the process of deciding which ports will benefit from a $1 billion ethanol expansion.

As of now, compartmentalized chemical tankers are the standard shipping method to get smaller volumes of ethanol around the globe. But Brazil is pioneering dedicated ethanol tankers. State energy company Petrobras last year announced it would have the first $130 million ethanol tanker built in a Brazilian shipyard by 2011. The most likely version, according to Bloomberg news service, is a 75,000-ton Panamax vessel.

There are limitations, though. For one, domestic demand in Brazil continues to grow fast; at this point the country exports only about 20 percent of its production.

And then there are U.S. trade barriers. The United States maintains a 2.5-percent general tariff on ethanol, plus a 54-cents-a-gallon additional tariff to protect domestic producers. The U.S. Congress just extended the extra tariff for another year. While John McCain has expressed his support for free ethanol trade, Barack Obama is likely to protect Midwest producers.

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