Can Mexico grow an ethanol industry?

May 25, 2016, 11:44 AM EDT
(Source: Jack/flickr)

A delegation of U.S. ethanol industry leaders wraps up its two-day visit to Mexico on Wednesday. "Our goal is to partner with Mexico to support the establishment of an economically viable ethanol industry there, where Mexican domestic production can be supplemented with imported product from the United States," said Acting Deputy Secretary of Agriculture Michael Scuse. He added that higher ethanol use would be “an inexpensive source of renewable energy that improves air quality, reduces greenhouse gas emissions, and stimulates the rural economy."

In less than a decade, Mexico has acquired the taste for ethanol -- despite very little domestic production. In 2006/2007, the country bought just 1.8 million gallons from the U.S., while in 2014/2015 it bought over 33.4 million gallons. That is still a far cry from the annual U.S. blending of 14 billion gallons of domestically-produced ethanol into transportation fuel, but it’s a start.

“With domestic use artificially capped by EPA at 14.8 billion gallons, we will continue to seek export opportunities,” said Renewable Fuels Association General Counsel Ed Hubbard, who is on the trade mission to Mexico. But there are larger aims than just exporting more ethanol south of the border. By partnering with Mexico, U.S. firms can make money consulting in the setup of all the different parts of the emerging industry. Additionally, replacing some gasoline with ethanol has several environment benefits, particularly when the sources are agricultural byproducts that would otherwise be discarded. (When whole crops are turned into ethanol, the overall carbon savings are harder to calculate but are certainly not as large.)

Mexico would mostly use sugarcane, and to a lesser extent sorghum, to make ethanol (in contrast to corn in the U.S.).The country passed a law in 2007 to promote and develop bioenergy, and in 2012 Biomex announced plans to invest $135 million in a sorghum-based ethanol plant in the state of Tamaulipas. But it was only last April that the industry got a longer-term boost. At the time, Pemex announced four 10-year purchase contracts for 32 million gallons of domestically-produced ethanol, valued between $524 million and $750 million. It also stated that $58 million would be spent on infrastructure upgrades to handle and blend ethanol into the gasoline it sells nationwide, and said Mexican ethanol producers were expected to invest at least $132 million to build and adapt their biorefineries. 

It remains to be seen what effect higher ethanol production might have on domestic food prices. A 2012 study found that prices of imported corn in Mexico were inflated by 27% due to ethanol production in the U.S., the source of virtually all of Mexico’s corn imports. If more sugarcane is used for ethanol, there might eventually be a trickle-down effect raising food prices for all Mexican consumers. Fear of a populist backlash could thus trim the ultimate size of the country’s nascent ethanol industry.