Brazil Slashes Ethanol Tax

The country’s largest producer is Raizen, a joint venture between Cosan Ltd. (NYSE: CZZ) and Royal Dutch Shell PLC (NYSE: RDS-A). A company executive has told the Financial Times that the government plans to reduce the tax on ethanol by nearly 80% in a move to help prop up the industry. A back-of-the-envelope calculation yields a cut from the current tax of about $0.30 a gallon to around $0.06 per gallon.

The government will not eliminate the tax completely for fear of stoking inflation in the country, which is currently running at an annual rate of about 6.5%.

It is difficult to predict the impact on U.S. ethanol producers like Archer Daniels Midland Co. (NYSE: ADM) or Pacific Ethanol Inc. (NASDAQ: PEIX). But ADM, for example, ran negative margins on its ethanol production last quarter. A tax cut in Brazil could make matters worse for U.S. producers.