Brazil's "ethanol subsidy"

Morgan Downey looks at the fact that ethanol is cheaper than gasoline in Brazil and concludes that Brazil, a vocal critic of ethanol subsidies in the United States, is slyly (and hypocritically?) subsidizing its own ethanol by taxing gasoline.

It may be true that Brazil taxes gasoline (something that might be nice for us to do in the U.S. as well), but the fact is that sugarcane ethanol production costs are often lower than even untaxed gasoline production costs at crude prices above $50/bbl. The key driver is feedstock cost (sugarcane), which tends to swing between a floor of its value to produce sugar (most ethanol mills can produce sugar instead if they prefer) and a ceiling of its value as fuel (in which case the miller and blender receive no margin). There are limits on the mobility of sugarcane, however – it must be crushed within 48 hours of harvesting or it rapidly loses its sugar content – which means that in practice mills often have pricing power over the nearby sugarcane growers, who have little other choice of buyer for their production.

Ethanol is also cheaper than gasoline on a volume basis because it has a lower energy content – about 70% of gasoline – so in an equilibrium market ethanol prices will be about 70% of gasoline prices (but Downey recognizes this).

Another factor which could effect the price is where in the country he was – São Paulo is the center of cane-growing, for example, and tends to have ethanol prices below the 70% parity due to oversupply, whereas more remote regions (like the northeast) tend to be above 70% parity due to transportation costs.

It could be the E25 tax is the primary factor, but it’s hard to determine how much without the amount of the tax, which Downey doesn’t provide.

My overall point is that there are many supply-demand factors which impact ethanol prices, and so a difference cannot be automatically attributed to government intervention without considering other plausible causes.

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