What will happen to ethanol makers when the US subsidy ends in December, as appears increasingly likely? Bunge Ltd. (NYSE: BG) apparently believes that demand  will continue strong, at least in Brazil and maybe the US as well.

Bunge has said that it will invest $2.5 billion to expand its Brazilian sugar cane and biofuel capacity by 2016. The investment will expand the company’s milling capacity (called crush in the industry) by 50%, to a total of 30 million metric tons annually. The investment plans follow last year’s $12 billion joint venture, Raizen, in cane ethanol by Royal Dutch Shell plc (NYSE: RDS-A) and Brazil’s Cosan Ltd. (NYSE: CZZ).

Other US ethanol makers, including Archer Daniels Midland Co. (NYSE: ADM), Valero Energy Corp. (NYSE: VLO), Pacific Ethanol, Inc. (NYSE: PEIX), and Great Plains Renewable Energy, Inc. (NYSE: GPRE), are also preparing for an end to US subsidies on corn-ethanol although there is not likely to be much impact on their top or bottom lines. The subsidy has largely been passed through corn producers.

Bunge’s decision should help Brazil return to self-sufficiency in ethanol production. The country has been unable to meet demand for ethanol and is importing some from the US and Europe. That has driven up prices for ethanol and gasoline, which at some times has been cheaper than ethanol due to government caps on the price of fuel.

Petroleo Brasileiro (NYSE: PBR), or Petrobras, has been forced to sell gasoline at less than cost at times, and the company will be glad to see an increase in the crushing capacity for sugar cane. Petrobras recently announced that it would invest $328 million in a new facility to make cane-ethanol. The oil giant plans to spend more than $2 billion on ethanol production and increase its market share in Brazil from 5% to 12% by 2015.

In the US, the federal mandate for ethanol blending with gasoline increases demand and is partly responsible for the run-up of corn prices. Ethanol production consumes about 40% of the total US corn crop. Once the subsidy for corn-ethanol and the $0.54/gallon tariff on imported ethanol end, imports from Brazil could take off.

Ethanol made from cellulosic material was supposed to have contributed 250 million gallons to US supplies this year. Instead, it is producing approximately none. The mandated volume for 2012 is 500 million gallons, which the government is considering reducing to 3.5 million gallons. And even that small amount will be a challenge.

Bunge, Raizen, and Petrobras are putting themselves in a strong position for domestic consumption in Brazil as well as for exporting ethanol to the US, where supply is unlikely to be able to keep up with demand.

Bunge shares are up more than 0.5% today, at $61.19, in a 52-week range of $50.52-$76.13. The ELEMENTS MLCX Biofuels Index Total Return ETN (NYSE: FUE), though quite small and lightly traded, is up more than 1% today, at $12.33, in a 52-week range of $7.40-$13.24.

Paul Ausick

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