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Ethanol Fuel: U.S. Caribbean Basin Initiative Provides Opportunities for Brazilian Ethanol Exporters

The concern recently expressed by the powerful U.S. senator and ranking member of the Senate Finance Committee, Charles Grassley from Iowa, the leading U.S. corn producing State, in his March 1, 2007 letter to President Bush may be highly indicative of opportunities for Brazilian ethanol producers, as a result of the signing of the Memorandum of Understanding Between the United States and Brazil to Advance Cooperation on Biofuels (“Biofuel Memorandum”) and the establishment of the Caribbean Basin Initiative (“CBI”). When referring to the potential construction of a pilot ethanol plant through a Brazil-U.S. partnership in the Caribbean, he noted that “under the CBI, ethanol from Brazil and other countries that is merely dehydrated can enter the United States duty-free up to the amount of 7% of the U.S. market”. He further noted that this 7% level has never been previously reached. Senator Grassley’s letter may be worth far more than its weight in gold and may prove to be a solid step in the right direction for Brazilian ethanol fuel producers. The main steps to ethanol production are: feedstock (e.g. corn, sugarcane or other crops) is processed into separate fermentable sugars; yeast is added to ferment the sugars; the resulting alcohol is distilled; and finally, the distilled alcohol is dehydrated to remove any remaining water. Senator Grassley’s concern over ethanol imports from Brazil through CBI countries centers on ethanol dehydration. According to a March 10, 2006 CRS Report for Congress, the U.S. International Trade Commission reports that one-half of all ethanol fuel imports came through CBI countries between 1999 and 2003. In 2004, imports from Brazil grew dramatically, but in 2005, ethanol exports from CBI countries again represented more than half of all U.S. ethanol imports. Although production costs in Brazil are believed to be between 40% and 50% lower than in the United States, the current most-favored-nation tariff of 54 cents per gallon, or rather, 14.27 cents per liter, serves as a significant trade barrier. The CBI is a duty preference program available to Caribbean Basin countries that have been designated as program beneficiaries. Although rules of origin and other availability rules are similar to the Generalized System of Preferences (“GSP”), the CBI provides that all articles are eligible for duty-free treatment unless specifically excluded by the statute. In other words, unlike the GSP, the articles do not have to be specially identified for duty free treatment by the president. The CBI provides that ethanol fuel is available for duty-free export to the United States without restriction, provided that it is produced from at least 50% local feedstock. Otherwise, ethanol fuel produced with no local CBI feedstock may be supplied duty free from CBI countries up to the limit of 7% of the U.S. import market, which as Senator Grassley pointed out, is an amount which has never previously been reached. Therefore, an opportunity exists for Brazilian ethanol fuel producers to ship hydrous ethanol to a dehydration plant in a CBI country for reprocessing. Dehydration plants are currently in operation in Jamaica, Costa Rica, El Salvador and Trinidad and Tobago. Under the leadership of Ambassador Sergio Amaral, former Brazilian ambassador to France and the United Kingdom, the biofuels team at Felsberg e Associados is prepared to render the necessary support and indicate potential partners to interested investors, exporters and importers. Ambassador Amaral’s impressive diplomatic and trade career coupled with the firm’s already thriving energy and international trade practices, place Felsberg e Associados in a unique value-added position to serve as a leader in the bio-fuel energy market.

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