Booming Oil, Grains To Kill Biofuels

Sydney, Mar 14, 2008 (ABN Newswire) - You wouldn't normally expect President George W Bush to understand irony, especially irony generated by the markets.

There he was last week telling the International Renewable Energy Conference in Washington that the US should "get off oil" and again calling for more use of ethanol, despite concerns the corn-based fuel is driving up food prices and isn't more environmentally friendly than gasoline.

"We gotta get off oil; American has got to change its habits. It should be obvious to all, demand has outstripped supply, which makes prices go up," media reports quoted the President.

Well, that's what's happening to corn, wheat, coal, oil, soybeans, soybean oil; and sugar prices have been rising. Some have hit records as stocks of the commodity fall and output remains steady or falls because of drought and farmers switching between crops.

In fact the very thing that ethanol is supposedly to partially replace - oil based fuel - is making the biofuel, in fact all biofuels uneconomic.

The seemingly remorseless rise of oil to unheard of levels ($US111 a barrel or more) is slowly strangling the attractiveness of replacement fuels, such as biofuels, because it is dragging up the price of corn, other grains and oil seeds.

At the same time rising demand for food, just as world stocks are at record or near record lows, is also boosting the prices of agricultural commodities.

The costs of production are rising because energy costs are on the rise; steel, aluminium, plastic and other raw material prices are on the rise; even land in rural parts of the US and Europe is rising in value because of the boom in the prices of corn, wheat, canola, soybean, cotton, etc.

At a time when Mr Bush is urging the US to 'get off oil' and offering ethanol as the main route, the economics of its production are worsening. Not even production and tariff subsidies can keep over 50 planned plants afloat and many others have closed or cut back on production to conserve cash.

US Fed chairman, Ben Bernanke did late last week in an appearance before the US Senate Banking Committee: he pointed out the subsidy drives up the price of ethanol in the US, increases other costs, and inflates the cost of corn. Removing it, he said, would contribute to lowering price pressures. His sensible words fell on deaf ears, especially in the White House.

Over a third of America's huge corn crop is consumed in ethanol production in the US which attracts a subsidy from the government and is protected by a 54 USc a gallon tariff from imports, especially from Brazil which makes its ethanol from sugar. 

That tariff expires later this year and who in an American election year, would be game to call for its abolition?

US ethanol production rose 38% to a record 636.8 million gallons in December from a year earlier, according to figures released earlier this month by the US Energy Department. Stocks of the additive totaled 441.4 million gallons, up 20% from year earlier while down 6.1% from November.

America currently has 143 ethanol distilleries in the US, with the capacity to produce about 8.2 billion gallons of the fuel a year, according to the Renewable Fuels Association in Washington. These are not all operating, or operating to capacity.

Part of President Bush's plan to wean the US off oil includes big investments in ethanol, and the energy bill passed by Congress and signed by Bush in December calls for refiners to replace 36 billion gallons of petrol with ethanol by 2020, up from about 7 billion gallons presently. About half of that will come from ethanol made with corn.

"That's good if you're a corn farmer, and it's good if you're concerned with national security," Bush said. But Chinese and European buyers are offering more for corn than are US ethanol producers.

Bush acknowledged some of the problems with ethanol, particularly its role in pushing up the price of corn. The price of corn has doubled since 2006 which has pushed up the price of chicken, beef and poultry, not to mention basic food costs in Mexico and other Latin American countries.

Crops like wheat and soybeans are becoming more expensive as farmers devote more acreage to grow corn as they rush to satisfy the demand for ethanol.

"I'm beginning to hear complaints from cattleman about the price of corn," he said. "We're going to do something about it."

I reckon George will leave office still promising to do something about it; perhaps he should be reading the US farm and business media where the surging price of corn has cut a swathe through existing and planned ethanol plants.

Last week the huge privately owned agri giant, Cargill, abandoned plans for a $US200 million plant in Kansas. Another unfinished plant was sold out of bankruptcy and plans for up to 50 new plants have been shelved in recent months.

With the credit crunch helping, high corn prices have all but ruined the economics of ethanol, especially for new plants.

The water consumption of the big new plants in the US is causing surprise, despite claims from the industry that can be 'water neutral' none are.

Besides the 143 ethanol plants in the US, with a further 60 under construction. Work on some of those has stalled because of the surging cost of corn, the credit crunch and rising building costs.

Corn prices have risen from less than $US2 a bushel in 2006 to a recent high of more than $US5.70. That's driven margins down to an estimated 3 USc a gallon, mostly for established large low cost plants: even with oil over $US103 a barrel.

And it's just not in the US. Biodiesel plants in Britain and Europe are also closing or on care and maintenance because of the surging price of animal and food waste and the main raw material, rapeseed canola.

Europe wants more than 10% of its energy needs to be met by biofuels in about three years time. At the moment that won't happen because existing plants can't operate with canola prices at current high levels.
And in Asia last week Indonesia's biggest biodiesel plant, a $US5.5 billion operation planned by local and Chinese companies, was abandoned because the cost of palm oil (the raw material) has been driven higher by surging Chinese demand for it and other edible oils.

The cost of the main ingredient of palm oil that can be refined and added to existing fuels, is selling for more than twice the price of the same oil based product, low sulphur gasoil, which has significantly more contained energy.

In its latest commodity outlook, the Australian Bureau of Agricultural and Resource Economics (ABARE) said.

"The United States, Japan and the European Union are the largest importers of ethanol and Brazil is the largest exporter. The United States is also an important exporter of ethanol, produced largely from corn, mainly to other North American Free Trade Association countries — Canada and Mexico.

"Like the world market for sugar, the world market for ethanol is distorted by a range of subsidies and market access barriers.

"In the United States, for example, there is a tariff and import duty on ethanol imports equivalent to a 25 per cent tariff.

"In the European Union, the tariffs are 45 per cent and 24 per cent on undenatured and denatured ethanol respectively. As well, in both the United States and the European Union, there are market access concessions that favour ethanol imports from developing countries.

"This is one of the reasons why Jamaica is a major re-exporter to the United States of Brazilian hydrous ethanol after its conversion to its anhydrous form.

"If the market access barriers for ethanol in the United States and the European Union were removed, the world price for sugar would probably be considerably higher.

"It is possible that the import duty of US54 cents a US gallon (US14 cent a litre) on ethanol could be lowered to enable the United States to meet its ambitious biofuels supply targets."

If you are taking a medium term view on ethanol, you'd have to believe that the demand for food in the shape of grains, edible oils and even sugar will (except for sugar in Brazil where ethanol is too deeply entrenched) will continue to make its economics unpalatable to car drivers, unless heavy protection and subsidies continue, especially in the US

Even in Brazil, a medium term outlook should start raising questions simply because the country has this year revealed massive oil and gas strikes offshore. 

They will take years and billions of dollars to develop, but they are so large they will change the energy picture in the Western Hemisphere, offsetting Venezuela's shrinking reserves.

This is approaching energy self sufficiency seduce Brazil into abandoning its drive to boost ethanol as a petrol additive? It current has around half the fuel market for cars. 

That would change the dynamics of both the ethanol and sugar industries

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