Quota row puts Brazil ethanol sector on alert

Ethanol producers are considering whether to appeal to Brazil's congress should president Jair Bolsonaro's decide to reinstate a tariff exemption for US ethanol imports without providing better access to the US sugar market.

Bolsonaro has still not communicated the executive branch's position on the preferential no-tariff regime for up to 750mn litre/year of ethanol imports, which officially expired on 31 August, leaving US ethanol shipments subject to a 20pc common import tariff. A senior government official confirmed to Argus that there has been no final decision on whether to reinstate the lapsed quota.

If the duty-free quota is reestablished without reciprocation for Brazilian sugar exports to the US, producers could petition the president of Brazil's congress for a legislative decree reversing the decision of the executive, Brazilian producers told Argus.

The 746.9mn l of ethanol imported in the first seven months of this year was just shy of the quota limit, but down 19pc compared with the same period of 2019, according to data from Brazil's trade ministry MDIC. US ethanol exports accounted for 89pc of the total imported so far in 2020.

Brazilians want access to US sugar market

Brazilian ethanol producers celebrated their last agreement in 2019, but soured on the plan after the expected opening of the US market for Brazil's sugar exports failed to materialize.

Brazilian ethanol producers, mainly in the northeast region, have pushed for an end to the regime in recent months and remain opposed to a reinstatement of the tax benefits.

"Brazil is self-sufficient in ethanol and we are against the introduction of a new term for the quotas to be in force," Alexandre Lima, president of the Brazilian federation of cane planters Feplana, told Argus.

Absent a new decision on the future of the tariff regime, all ethanol imported after 1 September from countries outside the Mercosur trade bloc are subject to import duties of 20pc. Mercosur includes Argentina, Brazil, Paraguay, and Uruguay.

The asymmetry between the sugar sectors in Brazil and the US has made it difficult for Brazilian producers to successfully target counterparts in the US and negotiate lower import duties for Brazil's sugar, which can reach 140pc. Unlike Brazil, where ethanol producers are also responsible for the country's sugar output, US production involves multiple segments of the agriculture sector besides corn ethanol producers, such as sugar beet and sugarcane producers.

"Quota regimes generate distortions in the functioning of the market," Adriano Pires, founding director of the Brazilian center for infrastructure (CBIE), told Argus.

For Pires, maintaining the regime does not make sense, especially absent reciprocity from the US. "There are other possibilities, such as increasing corn ethanol production" in Brazil, he said.

Brazil/US relations supersede trade dispute

Yet the Brazilian government sees the quotas as part of a broader strategy in improving bilateral relations with the US administration, as both presidents are aligned politically and ideologically.

The import exemption regime also constitutes a bargaining chip for the Brazilian government pursuing a broad political agenda — OECD membership among others — that benefit from US backing.

By Carolina Guerra