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MECAS(10)19 – Ethanol Prices and Drivers - a World Survey (English)

* Please note this report is also available in French, Russian and Spanish.

The lack of a world reference price is symptomatic of the significant differences in the level and dynamics of fuel ethanol prices among major producing and consuming nations: the United States, Brazil and the EU. Consequently, the international trade has tended to use the domestic spot price of anhydrous ethanol in Brazil as the world reference price.

Monitoring and understanding the key drivers of domestic ethanol prices in major producing and consumption countries is crucial to gauge the extent of any links between sugar and energy markets, and also to ascertain the prospects for global fuel ethanol trade. Key drivers impacting price levels and dynamics in the three major players include amongst others: crude oil and gasoline prices, market size and structure; government incentives and price setting arrangements; as well as feedstock price variability. The confluence of these market and government policy related price drivers are unique in each country/region. This is crucial in terms of the world ethanol trade, which is to a significant degree driven by arbitrage windows that arise when there are sufficient price differentials between the three major players. In particular, potential ethanol importers in both the US and the EU can arbitrage differences in domestic prices as against those in Brazil, typically the globe's lowest cost origin for ethanol to the fledgling world market. However, this past year, the US has emerged as the lowest cost origin and an arbitrage window has opened between the US and the EU.

In this paper, fuel ethanol prices and their particular drivers are thoroughly reviewed and analysed in the globe's 3 dominant fuel ethanol producers and consumers: the United States, Brazil and the European Union. These three accounted for 93 % of global fuel ethanol production in 2009 and accounted for the bulk of world trade in fuel ethanol. Relationships between prices for gasoline, feedstocks and ethanol are investigated, as are links between government ethanol related policy and ethanol prices. Key amongst these are ethanol inclusion mandates, the blenders credit in the United States, and differences in the level of fuels taxation. Ethanol prices in three other countries with far smaller fuel ethanol blending programmes are also examined - Colombia, Thailand and India, where ethanol prices ex mill/distillery are set by government according to different pricing formulae. The paper concludes by highlighting the unique confluence of the key price relationships amongst crude oil, gasoline, feedstock costs, government incentives, mandates and tariffs in determining fuel ethanol prices and their dynamics in each of the globe's three major producers/consumers. The crux of the flexible Brazilian sugar/ethanol industry in determining the strength of any link between sugar and energy markets is highlighted. Looking forward, attention is drawn to the possibility of a differential fuel ethanol trade developing according to relative carbon footprints.

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