By Gerard Wynn
LONDON, June 27 Rising crop costs are squeezing
biofuel margins and may see production fall or stagnate in the
United States for the first time since 1996, adding to
challenges in Brazil and Europe.
A long-run correlation between U.S. corn and crude oil broke
down this month, stemming from new fears for the world economy
coupled with harsh conditions in key corn growing areas.
The changing dynamic illustrates challenges for the sector.
U.S. corn ethanol production margins are driven by oil
markets and costs driven by corn markets: correlation between
the two is net neutral for biofuel margins, but they are now
diverging and driving grain-based ethanol further in the red.
In Brazil, meanwhile, ethanol is made from sugar where high
prices have also made ethanol uncompetitive with subsidised
In Europe, a long-run over-capacity in biodiesel continues.
In its short-term energy outlook this month the U.S. Energy
Information Administration forecast ethanol output this year
would remain flat at about 14 million gallons, still comfortably
above the minimum blending mandate this year of 13.2 billion
That would be the first time of flat demand since 1996. Some
analysts predict a fall.
Challenges for the U.S. industry include the expiry at the
end of last year of subsidies including a domestic blending
credit and import tax.
In addition, corn prices have risen on low inventories plus
tough growing conditions including a drought in U.S. Midwest.
Meanwhile U.S. road fuel demand is falling, with knock-on
effects for ethanol consumption which fell in the first two
months of this year, EIA data show.
U.S. spot ethanol margins have been negative for much of the
past year and stocks are rising.
That has led some ethanol plants to idle production. For
example, Valero Energy recently shut a 110 million
gallon plant until the next harvest.
On the upside, refining demand remains given continuing
positive blending margins where the price of gasoline
Meanwhile fuel manufacturers are now allowed to market
higher blends of 15 percent ethanol (E15) compared with 10
percent previously, pending commercial rollout.
In number 2 producer Brazil, most cars are flex-fuel,
running on various combinations of gasoline and ethanol.
Gasoline prices are persistently low, unchanged since 2006
and under-cutting a pure ethanol alternative whose production
costs rose with the price of sugar last year.
On Monday, the Brazilian government raised the gasoline
price but also lowered the tax, netting no change to consumer
prices and doing nothing therefore for ethanol economics.
Analysts estimate gasoline prices need to rise by 9 to 15
percent at the pump to make ethanol production sufficiently
attractive to stimulate investments again.
But Brazilian ethanol production could rebound, depending on
the relative economics of producing sugar or ethanol, as world
sugar prices fall.
In Europe, meanwhile, grain shortages have curtailed biofuel
production, while the biodiesel market is suffering from chronic
The European Union's renewable energy directive requires
countries to achieve a 10 percent share of green energy in road
transport by 2020, the vast majority of which will be met using
In addition, the bloc's related directive on fuel quality
forces oil companies to cut the carbon content of transport
fuels by 6 percent by 2020, again chiefly through biofuel
But the market has been paralysed by uncertainty over how
regulators will account for the carbon emissions of the
alternative fuel, as well as cheap U.S. imports and tight
vegetable oil and grain markets.
The global biofuel picture therefore is of muted growth,
owing to rising crop prices and reduced fuel demand.
The longer term future is also clouded, by profitability
doubts and the rollout of advanced biofuels, as well as
continuing doubts over the CO2 and food price impacts of first