Could importing sugarcane ethanol from Brazil be one of the solutions to the United States' food-to-fuel issue? During today's OnPoint, Joel Velasco, chief U.S. representative for the Brazilian Sugar Cane Industry Association (UNICA) addresses the debate over the ethanol import tariff and explains why, he believes, removing the tariff could help bring food prices down. Velasco discusses the new farm bill proposal and the impact it could have on food and fuel prices, if implemented. He also assesses the current state of the dialogue between the United States and Brazil relating to the tariff and the countries' ethanol industries.
Monica Trauzzi: Welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Joel Velasco, chief U.S. representative for the Brazilian Sugar Cane Industry Association. Joel, thanks for coming on the show today.
Joel Velasco: Great to be here.
Monica Trauzzi: Joel, there's a lot of talk right now on Capitol Hill about the renewable fuel standard that was signed into law in 2007. And some members of Congress would like to see the mandate frozen or rolled back because of the potential impact that biofuels production may be having on food prices. Do you believe that there is a direct correlation between biofuels and the rise in food prices that we're seeing throughout the world?
Joel Velasco: No, I think when you look around the world, if there's one reason why food prices are going up it has to do with energy, fossil fuels, continuing demand of it and, obviously, some environmental concerns and climate change issues in some parts of the world that have reduced the ability of some of these countries to produce. And then, finally, I think, or at least probably in the top three reasons it really has to do with the higher demand for protein for food around the world. Now that said, I think, in the United States there is some concern about the growing need for corn production going to ethanol. I think, I'm not sure, this is not necessarily corn made for food, necessarily, that you and I would eat, but it's certainly corn that eventually makes its way into the food supply through cattle, through poultry, or even through some other food products. And so I think there is that concern. I think limited here in the U.S., but I would think it's a far cry to say that even the U.S. corn ethanol program is directly responsible for this food crisis that so many people are pointing to around the world.
Monica Trauzzi: What about all the world leaders that are calling for everyone to be taking another look at biofuels and how much of an emphasis we're putting on biofuels?
Joel Velasco: I think part of this is because, and I think Senator Collins, I think in a hearing the other day, pointed this out, that there's some things that we can do something about and then some things we can't do something about. We can't control Mother Nature, for example because of the issues in maybe the Australian crop problems, but we can do something perhaps about, and this is what I think she's trying to point out, that there's some mandates that maybe don't need to be this strong. Or, as I think we would rightfully point out, that we don't have to depend only on one feedstock to produce ethanol for the United States.
Monica Trauzzi: So how do you think this RFS situation should be handled?
Joel Velasco: I think the RFS is not going to -- you know, removing the RFS or scaling back right now is not going to have any impact on the price of ethanol or the price of food. Why? Because the differential between the ethanol produced today, the price differential between ethanol and gasoline is so great that there is a ready and economic incentive to blend as much as the system can take of ethanol into the fuel supply. So, if you remove the RFS, you're not going to see demand for ethanol go down any further, simply because of the price of oil.
Monica Trauzzi: OK, and your organization has taken a look at the farm bill, the newly proposed farm bill, and you've said that it's a step in the wrong direction to reducing food and fuel prices. Why?
Joel Velasco: Well, first, I think the farm bill is doing two things. One, it's extending the ethanol import tariff that currently is the secondary tariff. There's first a tariff of 2.5 percent ad valorem that is the first tariff. And then there's a secondary tariff that was created some years ago, a $0.54 per gallon of ethanol imported, that tariff was due to expire at the end of this year. It was renewed in 2006 and now it's getting renewed again. Every time it gets renewed the people tell us it's the last time. We're now going on for another two years according to this farm bill. If we extend this tariff for another 10 years and at the same time reduce the incentives that the blender has, which is currently $0.51 a gallon to $0.45 a gallon, what are we doing? We're, in essence, telling the blender that you can use any feedstock that you want, any type of ethanol you want, but if you choose the imported one you're going to have to pay a premium for it. And we think that it's only going to encourage the use of even greater corn ethanol. Now, greater use of corn ethanol in the U.S. is going to do what? It's going to put more pressure on corn prices and that's why I think that if you're trying to do anything, the worst solution possible is really what's being proposed right now, is continue the tariff, continue the protectionism, lower the incentive to the blender simply to exacerbate the difference in the trade distortion between the imported fuel, ethanol from sugarcane from Brazil in this case or from other countries and the domestically produced ethanol from corn.
Monica Trauzzi: But the U.S. ethanol industry says that it still needs this tariff and the subsidies to help them along, because they're not yet standing on their own two feet. So, by removing the tariff would we essentially pulling the rug from under the U.S. ethanol industry and not allowing it to grow and get to the point where it could be?
Joel Velasco: Well, I don't know. You know, if you're already consuming one third of the U.S. corn supply, that you need to be more mature. I don't know if you need to be more, I mean the Senate Finance Committee's I think press release yesterday, when they described the tariff cut, they themselves stated that the industry is now mature. The government has taken the position, Secretary Bodman has said that this industry is mature. I think the president has pretty much convinced himself that this industry is mature. This industry is now the world's largest ethanol industry. Brazil has been doing ethanol for 30 years. In two years the U.S. industry surpassed the Brazilian industry. We'll produce about 5 or 6 billion gallons of ethanol this year from sugarcane. The U.S. will produce about 9 to 10 billion gallons. Who is the more mature? I mean in terms of size, certainly there's no comparison.
Monica Trauzzi: When Don Endres is of VeraSun was on our show a few weeks ago, he said that the tariff and the subsidy shouldn't be removed until the U.S is able to produce enough of its own fuel to meet demands.
Joel Velasco: Well, listen ...
Monica Trauzzi: Is that a valid argument?
Joel Velasco: It's a decision that the U.S. needs to make, whether or not they want to have a subsidy program. So long as it complies with international treaties, it's a decision that the U.S. can do and nobody is going to take that away from them. It's a sovereign right to the United States. Now, here's the issue, the issue for us is that when the tax credit becomes a subsidy, and several people in the Congress and elsewhere have accepted that it's a subsidy, even though it's not called a subsidy per se. And on the flip side the decision has been to extend the tariff, that differential is not helping just ensure that there's no taxpayers' money going from the U.S. to Brazilian farms. It's actually making sure that more profits from Brazilian farmers are going to the American consumers. Now, you know, we're not talking about, we wish the ground were level. What the farm bill is doing is actually exacerbating the distortions in favor of the American producer and I think this may well cause some issues in terms of World Trade Organization.
Monica Trauzzi: But by removing the tariff would we be subsidizing foreign production?
Joel Velasco: If you remove the tariff today and maintain the tax credit, some have argued, and actually we disagree with this position, but some have argued that that would eventually be a way of indirectly saying that it's encouraging Brazil. I disagree with that, because the reality is we don't get the benefit. We, the Brazilian producers, my members don't get the benefit of that tax cut that is given one year later after we sold the product. And economists have pointed out it doesn't work that way. That said ...
Monica Trauzzi: But there would be more Brazilian ethanol in the U.S. then.
Joel Velasco: There would be more Brazilian ethanol in the U.S. and there is ...
Monica Trauzzi: That would help your producers.
Joel Velasco: Sure, but listen, our product is significantly more inexpensive than the American product. We produce a lot. Our yields are higher. Our production costs are lower because we use less energy. We are always going to feel that we have an advantage here because we have a better product.
Monica Trauzzi: Has there been any progress recently between the U.S. and Brazil in terms of the conversation that's happening about ethanol and linking these two industries?
Joel Velasco: The conversations between the U.S. and Brazil are very good, but they're not focused on the commercial aspects of this. There's a memorandum of understanding between Brazil and the United States and it's focused in three areas, basic cooperation on basically advanced technology, second-generation technologies; helping other countries outside the United States and Brazil identify ways to produce biofuels locally. We're primarily focused in Central American countries right now, both countries. And then a lot of this is done through these exchanges of scientists. And then, finally, we're working on global standards for ethanol so that there one day can truly be a global market of ethanol as there is of petroleum products. That discussion is ongoing. It's very good. Sometimes I think from the perspective of the industry we wish it went faster, but we'll leave government officials to work at their own rate. The discussion about tariffs and subsidies and market issues has never come out between this thing and I think it's rightfully so. It's an area of disagreement and the governments are trying to focus on the positives.
Monica Trauzzi: Are you confident that if the tariff were to be removed that your industry would be able to meet these increasing demands for sugar ethanol?
Joel Velasco: First, I think Brazil is ready to meet whatever demands that the U.S. will have, but we're not asking and we have no intentions or desires to replace corn ethanol. We just think that the price of corn ethanol is being distorted in the U.S. to a point where it creates no incentives for anybody else to try to sell to the U.S. And we feel that we could be selling, we've been selling, for the last four years we've been selling ethanol in the U.S. We've sold probably total, in terms of dollar figures, about a billion and a half dollars in the last four years, since the Iraq war, to the United States directly. In that period, of that amount, we paid $400 million in tariff, just in the secondary tariff and the 2.5 percent ad valorem. Now, I'm not sure if we proposed a tax of 30 percent on imported oil, that anybody here would say that's a good idea. But we do the same thing with imported ethanol.
Monica Trauzzi: I can't let you go without asking about recent reports about biofuels and climate change.
Joel Velasco: Sure.
Monica Trauzzi: Because there have been reports that say that biofuels or not this silver bullet that we once thought they were, in terms of reducing emissions. What's your take on that coverage and those reports? And do you think that biofuels can help in the fight against climate change?
Joel Velasco: Well, to use the words of a famous Washingtonian, there was some irrational exuberance in this space some years ago, and I think we may be seeing some of the same again. The pendulum has swung one way and now it's swinging, perhaps, too far the other way. I think biofuels are by far one of the best, if not the only current solution, to reduce world dependency from fossil fuels in the liquid transportation area. Without a doubt, whether it's from corn, beet, or sugarcane, I think it is certainly a part of this solution. Obviously, we believe and we have the science to show that our feedstock, sugarcane, is far better than all of the other existing Biofuels. Why? Because we have an energy balance on it far better. For every one unit of fossil fuel input, we get nine units out. We have a reduction on the lifecycle basis of greenhouse gases of almost 90 percent, compared to yesterday's gas. I mean we're not even talking about comparing it to tomorrow's gasoline, which will come from either deep in the ocean bed or in tar sands. And we feel very good about our yields and our production costs. And I should also say that I would be remiss if I didn't point out that so many people think that, well, the sugarcane, it's Brazil, it must come from the Amazon. Well, first, it's produced 2000, 3000 kilometers, a thousand or plus miles from the Amazon itself. It occupies all the ethanol that Brazil produces a day, which displaces 50 percent of the country's gasoline consumption. Gasoline is an alternative fuel in Brazil now, not ethanol. It occupies 1 percent of the country's arable land. One percent of the country's arable land does not, the entire production of sugarcane today is less than the yearly levels of deforestation of the Amazon today. What does that mean? It means if you actually just tried to take all the sugarcane that's planted in southern Brazil and moved it into the middle of the Amazon, virgin forest and cut it down, you still could not explain the deforestation of the Amazon. Why? Because the deforestation of the Amazon has nothing to do with sugarcane. It has to do with the logging activities that are illegal, and I would be the first to say that there is plenty of deforestation of the Amazon. It has to do with the cattle ranching that occurs because the world is demanding more protein from Brazil. And so I'm not here to defend Brazilian environmental policy, but I certainly have no doubts that my industry, the sugarcane industry in Brazil's environmental record is very strong. And I think we will stand any test that gets put before us.
Monica Trauzzi: OK, we'll end it right there on that note. Thanks for coming on the show.
Joel Velasco: Thank you.
Monica Trauzzi: This is OnPoint. I'm Monica Trauzzi. Thanks for watching.
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