Des Moines Register
10-18-07
BRAZIL: Loophole hurt U.S. ethanol prices
Brazilians cash in on customs law quirk; U.S. won't say how much was paid
By JERRY PERKINS
REGISTER STAFF WRITER
A loophole in U.S. customs law grants oil companies incentives to import
Brazilian ethanol, negating a tariff that protects American ethanol producers.
The so-called duty drawback allowed imported ethanol to lower the price of the
fuel in the United States last year, according to one economist - and it costs the
U.S. Treasury millions of dollars each year.
More than 434 million gallons of Brazilian ethanol were imported into the United
States last year, but Customs Service officials in Washington, D.C., declined a
request by The Des Moines Register to provide the amount of duty drawback
collected by companies for ethanol imports.
Maggie Myers, a spokeswoman for the U.S. Customs Service, said the
information was deemed to be "law enforcement sensitive" by lawyers at the
Customs Service, which is now part of the Homeland Security Department.
Here's how the so-called duty drawback works: Companies import Brazilian
ethanol into the United States, then receive a rebate on taxes they've paid on the
ethanol when they sell jet fuel for export.
Here's one potential impact: If importers can avoid the tariff, U.S. producers
worry that they may lose out to Brazil, which can make ethanol more
economically with sugar cane and lower labor costs.
"It's nonsensical to say ethanol is the same as jet fuel," Sen. Charles Grassley,
R-Ia. "The (drawback) law makes no sense."
Grassley, who is ranking minority member of the Senate Finance Committee, is
pushing for repeal of the drawback. The committee estimated that repealing the
duty drawback will add $44 million to U.S. tax revenues over 10 years.
But that impact could grow larger, said Chad Hart, an agriculture economist at
Iowa State University. Imported ethanol may be needed to meet laws requiring
the use of more biofuels, he said.
Last year, U.S. ethanol prices made importing foreign ethanol profitable. By
receiving a rebate on the tariffs that were paid to import Brazilian fuel, companies
could make even more money by bringing it into the United States.
Dan van Zijll, who is responsible for North American imports of ethanol for
Vertical, a global biofuels trading company, estimated that some large oil
companies that imported ethanol from Brazil to the United States paid $50 million
to $100 million in tariffs last year.
By turning around and exporting jet fuel, he said, those companies will receive a
rebate on nearly all of that money.
Beneficiaries of the rebate include oil companies that refine jet fuel, van Zijll said.
"If they make jet fuel, they are selling it to airlines," he said. "They are the ones
who are importing the ethanol."
Grassley said there is a good chance the duty drawback for ethanol and jet fuel
will be repealed by Congress.
Drawback provisions in U.S. customs law date back to 1789, when the
Continental Congress established them to promote jobs, encourage
manufacturing and boost exports, according to the U.S. Customs Service.
Joel Severinghaus, international trade analyst for the Iowa Farm Bureau
Federation, said the drawback lumps ethanol and jet fuel together as finished
petroleum derivatives, even though ethanol is not a petroleum product.
"I do think it's a bit of a stretch to say jet fuel is the same as ethanol,"
Severinghaus said.
Two tariffs apply to ethanol imports, which are intended to shelter U.S. ethanol
plants from foreign competition and to deny the benefits of U.S. domestic ethanol
subsidies to foreign ethanol producers.
Attempts to remove the tariffs on ethanol have come mostly from senators on the
East or West coasts, but the Senate has voted to keep the tariffs in place.
One sets a tariff of 2.5 percent based on the value of the ethanol imported. The
second levies a 54-cent-a-gallon duty on each gallon imported.
Grassley said the 54-cent-a-gallon tariff was imposed to keep foreign-produced
ethanol from collecting the federal income tax credit, which has been in place for
more than 20 years.
The blenders credit, as it is known, gives a credit of 51 cents for each gallon of
ethanol that is blended with gasoline, whether the ethanol is produced in the
United States or not.
Allowing Brazilian ethanol to qualify for the tax credit would subsidize Brazil's
ethanol industry, Grassley said.
Emerson Kloss of the agriculture and biofuels section at the Brazilian Embassy in
Washington, D.C., said Brazil considers the U.S. tariffs on ethanol imports as
violations of World Trade Organization rules.
"We think they are market-distorting barriers, but we aren't sure if we are going to
file a complaint" at the WTO, said Kloss.
Robert Dinneen, president of the Renewable Fuels Association in Washington,
D.C., said that if Brazil complains about the ethanol tariffs, it won't succeed.
"This isn't about barriers to the entry of ethanol," Dinneen said. "It's about access
to the U.S. taxpayers' pocketbook. That's what this is all about."
Brazil's ethanol industry has had 30 years of government subsidies, he said, and
doesn't need U.S. taxpayers' largesse.
"No country should subsidize another country's renewable fuel production,"
Dinneen said.
Kloss said that 10 percent to 15 percent of Brazil's ethanol is exported, most of it
to the United States.
Severinghaus said Brazilian ethanol officials told him in January 2006, when he
toured the country to see its biofuels industry, that Brazil wants to focus its
ethanol exports on Asia, not the United States.
Kloss said there is no Brazilian government policy to push exports of ethanol.
"It's economics," he said. "If ethanol producers find a better price in the export
market, then they are free to export."
The Brazilian imports lowered the price of ethanol here, said Bruce Babcock, an
economist at Iowa State University, but U.S. ethanol plants still made healthy
profits in 2006.
Babcock, director of the Center for Agriculture and Rural Development, said
Brazilian ethanol exports to the United States spiked in mid-2006 when MTBE,
an oil-derived ethanol competitor, was phased out because of groundwater
pollution.
The resulting demand for ethanol sent prices over $4 a gallon at one time,
Babcock said. From March through August 2006 prices for ethanol were about
$2.50 a gallon.
High prices for ethanol made it profitable to pay the freight and import tariffs on
the Brazilian fuel that was shipped to U.S. ports, Babcock said.
"It's safe to say ethanol prices in the U.S. would have been higher without the
Brazilian imports, but U.S. ethanol plants still made money hand over fist during
that time," Babcock said.
It's not economical to import Brazilian ethanol these days, said van Zijll, the
international ethanol trader in Houston, because the current U.S. ethanol price is
too low at about $1.70 a gallon. The United States is expected to import about
200 million gallons of ethanol from Brazil in 2007 because prices have fallen,
Babcock said.
Farm Editor Jerry Perkins can be reached at (515) 284-8456 or
jperkins@dmreg.com