Sugar cane ethanol's not-so-sweet future

Despite environmental and economic benefits, trade protectionism, production issues likely to stand in the way of Brazilian exports hitting U.S. energy market en masse.

By Jeff Cox, CNNMoney.com contributing writer

NEW YORK (CNNMoney.com) -- Imagine a fuel that does not come from the Middle East, is about six times more economical to produce than corn ethanol and has the potential to help the environment because it requires few chemicals to grow.

Then imagine there's virtually no chance such a thing will ever come to the United States, at least in any appreciable numbers.

Meet sugar cane ethanol, a product fueling economic growth in Brazil, a nation that between its oil reserves and the burgeoning ethanol industry has attained energy self-sufficiency.

Brazil has spent billions of dollars over decades of research to develop the technology to mass produce ethanol from the millions of cane acres that spread along the South American landscape.

But due to a number of factors, primary among them the simple logistics of not being able to grow enough of the crop domestically, along with stringent tariffs against Brazilian sugar cane, that success is unlikely to be replicated in the U.S.

"The reason we use corn and grains in this country to make ethanol is that's what we produce best. It's the easier thing for us to do at the moment," said Matt Hartwig, spokesman for the Renewable Fuels Association. "The likelihood that cane will become a huge ethanol foodstock isn't high, though you may see it in the future."

Pitfalls and potholes

Brazil didn't have an easy road either in developing its sugar ethanol production.

Along the way, the country has seen its shares of pitfalls, including the mass emission of greenhouse gases through burning of cane fields when harvesting the crop, a practice the government is working to curtail.

Brazil also wrestled with the blend it uses, eschewing the 85 percent ethanol/15 percent gasoline combination used in most American flex fuels and using a 95 percent ethanol/5 percent additive blend.

Some experts say the Brazilian formula gets even less gas mileage than its corn ethanol counterpart, which itself gets lower mileage generally than gasoline.

The country also will need to invest perhaps $1 billion or more in infrastructure improvements over the next few years to keep up with demand, and Brazil has heaped billions in subsidies on its ethanol producers, though it has over the years decreased that amount.

But Brazil has managed, probably more than any other nation in the world, to carve out a thriving ethanol industry that exports millions of barrels a year -including about 160 million to the U.S. - and provides about a million jobs for its residents.

Investor George Soros said in May he is investing $900 million in Brazilian ethanol, while Archer Daniels Midland (Charts, Fortune 500), in its earnings statement last week, said it was expanding into the market as well.

The industry in Brazil could serve as a template for the U.S. and others looking to implement strong biofuel practices. But with a strong corn lobby looking to protect its crop as the primary ethanol source, and the sugar industry standing tight guard over tariffs on Brazilian exports, the notion of cane being used on a broad scale in the U.S. seems remote at best.

Philip Hayes of the American Sugar Alliance said his group would stand strong against any governmental efforts to drop sugar tariffs.

"Certainly we would be opposed to that," he said. "There are 120 nations in the world that produce sugar, and there are 120 governments that intervene in sugar production in order to protect domestic producers from Brazilian sugar."

In addition to tariffs, there are substantial production issues.

The U.S. climate simply isn't conducive to mass sugar cane growth, with the bulk concentrated in Florida and Louisiana. Brazil is expecting a record crop this year of 528 million tons; the U.S. is expected to produce about 3.7 million tons.

The U.S. government also is heavily subsidizing its own ethanol industry, to the tune of 51 cents per gallon produced, and is targeting billions in this year's farm and energy bills to develop additional non-corn ethanol sources, including some minor provisions devoted to sugar-based ethanol.

Meanwhile, the American tariff on Brazilian ethanol is 54 cents a gallon.

All that adds up to bad news for those hoping that Brazil's solution may help to ease, however gently, the U.S. transition away from Middle Eastern oil.

Still, some hold out hope, including veteran adman Stan Cotton, who works for an advocacy group calling itself the Foreign Oil Independence League. The group believes protectionist trade policies and powerful economic interests in the corn and oil industries are depriving Americans of a beneficial alternative fuel.

"Cane's got a 30-year history of working," Cotton said. "Why wouldn't it work here?"

The answer to that question, according to Jerry Taylor from the libertarian Cato Institute, is that the picture in Brazil may not be as rosy as some paint. Should the Brazilian government not be able to keep up with its subsidies, the economics for sugar cane ethanol could get dicey, he said. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.