Feature: European, Brazilian Ethanol Industry Participants Evaluate Impact of EU/MERCOSUR Trade Deal

December 09, 2024

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by Harry Clyne, Vinicius Damazio, Suzanna Hayek, and Phillip Herring ((S&P Global) Free trade deal agreed, still to be ratified; Mid to long-term impact on European dynamics expected; Brazil to fulfil majority of duty-free ethanol quota -- The European Union and the Mercosur bloc have agreed on the terms for the long-awaited free trade deal, European Commission President Ursula von der Leyen announced in Montevideo on Dec. 6.

"In light of the progress achieved since 2023, the Partnership Agreement between MERCOSUR and the European Union is now ready for legal review and translation. Both blocs are determined to carry out such activities in the next months, with a view to the future signing of the agreement," the Signatory State Parties of MERCOSUR and the European Commission said in a joint statement Dec. 6.

The Mercosur bloc's founding members -- Argentina, Brazil, Paraguay and Uruguay -- can implement the deal when each of the nation's national legislature approves.

The process in the EU is more complex; after a translation and legal review, the agreement may be split up for approval. The main trade deal could move forward if a majority of lawmakers and a qualified majority (i.e. 15 countries representing at least 65% of the EU population) of EU governments approve it.

France has shown opposition to the deal, expressing fears that it would allow a significant increase in South American agricultural imports such as beef, which could undercut local producers. Additionally, the Polish agriculture ministry earlier this month cautioned the deal may negatively impact Polish poultry and beef, sugar and ethanol producers the most.

To block the deal, at least four countries representing over 35% of the population need to vote against it. France plans to rally support from Austria and the Netherlands, which together with Poland make up 30% of the EU population.

Germany, Spain and nine other EU countries, which represent 40% of the EU population are pushing for the deal to be finalized this year.

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European opinion divided on scale and impact of deal

Initial reaction to the agreement was mixed from the European ethanol industry, as market participants and industry groups weigh up the scope of the deal with specifics still to be determined.

"I'm not expecting significant impacts in the short term," a Europe-based ethanol trader said. "Key products will, most likely, have quotas and the agreement includes a phase-out period during which tariffs are gradually reduced, which can extend up to 15 years. Overall, it is a long implementation timeline."

A second trader said that an ethanol quota would be met almost entirely by Brazilian exports and that whatever the duty-free quota was set to be for ethanol trade would at least amount to "a few boats" worth per year, which "will make the European price more fragile."

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The news was received negatively by the European Renewable Ethanol Association (ePure), the industry group representing a majority of European ethanol producers.

"The European Commission ignored repeated warnings from European bioethanol producers and decided to offer Mercosur countries a huge share of the EU's ethanol market. In doing so, the EU is putting at risk European biorefineries producing food, feed, fuel, fertilizers and much more," a statement from ePure said Dec. 6.

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Brazil trade flows likely to change on increased EU exports

In Brazil, ethanol players are also trying to work out the potential impacts of the trade agreement on their operations. Traders consulted by Commodity Insights throughout this week welcomed President Luiz Inácio Lula da Silva's effort to land the prospective EU-Mercosur deal, but offered partial insights or declined to speak on the record until the deal is in place.

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"Internally, Brazil should establish a procedure to allocate this quota among interested parties," an analyst at a major trading firm said. "This could be similar to the system already in place for sugar, where a total volume is set annually and distributed among mills in Northeast Brazil, as mandated by law." READ MORE

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EU-Mercosur: a bad deal for Europe’s ethanol sector, for farmers, for food security, for strategic autonomy (ePURE)
EU-Mercosur trade agreement includes ethanol provisions (Ethanol Producer Magazine)

Excerpt from ePURE: Even after more than five years of re-negotiation and tinkering, the EU-Mercosur agreement remains a bad deal for the EU renewable ethanol sector, for European farmers and for Europe’s drive for strategic industrial and agricultural autonomy.

The European Commission ignored repeated warnings from European bioethanol producers and decided to offer Mercosur countries a huge share of the EU’s ethanol market. In doing so, the EU is putting at risk European biorefineries producing food, feed, fuel, fertilizers and much more.

European ethanol producers are not opposed to trade, provided it is fair and integrated in a consistent long-term strategy – something Brazilian ethanol producers have enjoyed for decades. In the EU, unfortunately, we have no such strategy.

After having encouraged billions of euros of investments in EU biorefineries under the 2009 Renewable Energy Directive, the EU took two contradictory routes that have led to so much frustration:

One was to restrain ethanol consumption and production after having rightfully recognized in 2003 this renewable energy would contribute to de-fossilising transport and reducing the EU’s dangerous energy dependency
The other was to offer, at the beginning of negotiations with Mercosur, a huge share of the nascent EU ethanol market basing the calculation on a projected ambitious growth which never saw the light because of the first route taken by the EU

Consequently, the share of the ethanol market ceded to Mercosur, which was projected to represent about 6% of a balanced and dynamic ethanol market, now represents 12% of the total EU production capacity, in a market that is not growing anymore and already fully open to imports from many other countries, including major producers such as Canada and Pakistan.

Beyond threatening our investments and thousands of jobs mostly in rural areas, this agreement with Mercosur is undermining EU energy dependency and food security, as well as our ability to decarbonize sectors such as aviation, maritime and the chemical industry. Before the agreement materialises, the EU has some years ahead to revert the trend, put together a coherent visionary plan to give EU producers the means to compete with Mercosur on equal footing. READ MORE

Excerpt from Ethanol Producer Magazine: A fact sheet published by the European Commission indicates the agreement includes an ethanol duty reduction, which aims to support EU job creation. According to the fact sheet, a duty-free quota of 450,000 metric tons of ethanol will be opened for ethanol, to be used by the chemical industry. A quota of 200,000 metric tons of ethanol will be opened for all other uses, to be phased in gradually over five years. That volume can be used for the fuel segment of the market, which represents the largest component of EU ethanol consumption. The EU noted that 4 million metric tons of the 6 million metric tons of ethanol consumed annually in Europe is used as fuel.

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UNICA, the Brazilian sugarcane industry association, has spoken out in support of the trade agreement, noting it opens new opportunities for the sugar and bioenergy agroindustries.

“This pact will allow Brazil to expand its presence in the European market, with significant potential for diversifying exports and increasing the competitiveness of the sugar-energy sector, which remains committed to sustainable production and a low-carbon economy,” UNICA said in a statement.

Additional information on the trade agreement is available on the European Commission’s website. READ MORE