The U.S. and Brazil have agreed to revive for 90 days the expired tariff rate quota that allows some U.S. ethanol to flow to the South American country duty free, the two countries said in a joint statement Friday night.
It’s a stopgap deal that takes effect Monday and gives the two countries time to negotiate a more permanent deal and pushes the deadline for the politically sensitive issue past the U.S. presidential election in November.
The TRQ, which allowed 198 million gallons of U.S. ethanol to avoid Brazil’s 20% tariff annually, expired on Aug. 31. It will be reinstated as a pro rata TRQ “for ethanol proportional to the total annual volume of the TRQ that was in force on August 30, 2020.”
U.S. farm and fuel groups had been pushing for an expansion of access to Brazil’s market and expressed disappointment with the 90-day extension. U.S. ethanol exports to Brazil are traditionally stronger at the end of the year, the U.S. Grains Council, Growth Energy, Renewable Fuels Association and National Corn Growers Association said in reaction to the deal. The short-term fix will cause “greater uncertainty for U.S. exporters looking to make selling decisions now for the traditionally higher Brazilian demand in the winter months.”
The joint statement released by the U.S. and Brazilian governments stressed that ongoing talks will focus on “ways to ensure there is fair market access along with any increase in the consumption of ethanol, as well as to coordinate and ensure that the ethanol industries in both countries will be treated fairly and benefit from future regulatory changes on biofuel products in Brazil and the United States.”
Beyond negotiating better access for U.S. ethanol in Brazil, the statement suggested the U.S. may be open to importing more Brazilian sugar. That could help placate Brazilian sugarcane farmers, who are seeing less and less of their crop go into ethanol.
Brazilian ethanol consumption is expected to drop by about 18% to about 7 billion gallons this year because fewer people are driving during the COVID-19 pandemic, according to USDA’s Foreign Agricultural Service.
Brazil and the U.S. — both of which are major corn producers and exporters — will also “consider an increase in market access for corn in both countries,” according to the statement.
The Brazilian TRQ for 198 million gallons of U.S. ethanol, annually, expired on Aug. 31 despite intense negotiations that continued through this week. The expiration of the TRQ, exposing all U.S. exports to Brazil’s 20% tariff, raised tensions on Capitol Hill, where farm-state lawmakers have been demanding the U.S. Trade Representative protect the interests of U.S. corn farmers and ethanol producers that depend on exports of the fuel.
House Agriculture Committee Chairman Collin Peterson called the Brazilian tariff “more bad news for our producers” and stressed that it worsened the situation in which “corn and ethanol producers are struggling to access domestic markets because of the coronavirus and the Environmental Protection Agency's reckless implementation of the Renewable Fuel Standard."
The ethanol tariff question put Brazilian President Jair Bolsonaro in a difficult situation. His administration has been wooing the U.S. for tighter trade and investment ties as his personal relationship with President Donald Trump has strengthened. While a rift over ethanol trade created new tension between the two governments, Bolsonaro has also been under pressure domestically from the powerful sugarcane lobby that is demanding the TRQ be scrapped and the 20% tariff remain in place.
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U.S. negotiators thought they had a breakthrough last week, but it did not pan out. Brazilian negotiators tentatively agreed to a 90-day extension of the TRQ on Aug. 1, but officials in Brasilia balked at the deal.
The intense negotiations over the past few weeks add to the drama over the past three years. Faced with growing corn-based ethanol imports from the U.S., Brazil enacted the 20% tariff in 2017, but also initiated a 159-million-gallon TRQ to try to keep the influx to a minimum. The TRQ was a temporary measure, set to expire at the end of August 2019, but Brazil found itself in a difficult situation at the time. The country was under new leadership after Bolsonaro was elected in 2018. The right-wing leader, dubbed by some as the “Trump of the Tropics,” was swiftly on good terms with Trump, but Brazilian farmers were still adamantly opposed to lifting all barriers to the U.S. ethanol.
So the TRQ was extended by a year, and — in an attempt to mollify the U.S. — Brazil raised the tariff-free amount to 198 million gallons.
The U.S. exported about 500 million gallons of ethanol in 2018, but that dropped sharply by more than 30% to just 340 million gallons in 2019, according to data from the U.S. Energy Information Administration.
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