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Biofuels Industry under scrutiny amidst drought

04 Sep

U.S. corn is suffering under historic drought conditions, causing crop yield projections to drop over the past two months. As result, corn prices have increased by more than 50 percent since the first quarter of 2012.

As the largest global producer and exporter of corn, the United States is under domestic and international pressure to keep prices as low as possible. Though the drought is the primary cause of the recent price increases, growing biofuel production spurred in part by U.S. government mandates over the past decade has also heightened demand for corn, adding upward pressure on prices. Even if these mandates were to be removed, however, prices would not necessarily decrease since ethanol production is only one of many factors influencing the commodity.

Analysis by Stratfor (click here to visit their excellent website)

Field corn accounts for the vast majority of the crop produced in the United States, and the starch derived from it can be used as the feedstock, or starting material, for ethanol production. By contrast, sweet corn, the kind most often used in canned or frozen foods or eaten fresh, accounts for less than 1 percent of total U.S. corn production. More than one-third of the country’s field corn gets used to make ethanol, with the rest used as livestock feed or as a base in a variety of foods such as corn syrup and flour.

Ethanol production began to increase significantly in the early 2000s after becoming a popular gasoline blending component used to increase octane levels and meet environmental standards. Subsequent legislation, including mandates, subsidies and tariffs, increased demand for ethanol dramatically. The share of the U.S. corn crop dedicated to ethanol production increased from 7.5 percent in 2001 to 23 percent in 2008 and is projected to reach as much as 40 percent in 2012, or roughly 38 million of 96 million total acres of planted corn.

The production of ethanol is unlikely to decrease in the near future, in no small part due to the U.S. Energy Independence and Security Act passed in 2007. The act requires that 13.2 billion gallons of ethanol in 2012 and 15 billion gallons annually by 2015 be used for transport fuel. However, several states have petitioned the U.S. Environmental Protection Agency for exemptions from the fuel mandate. It is unclear how such waivers would impact food prices, although a recent study conducted by Purdue University estimated that waivers could cause corn prices to drop by as much as $1.30 per bushel. Alternately, according to the study, if ethanol demand is heightened by oil prices topping $120 per barrel, waivers could have little or no effect on corn prices. In other words, blending ethanol with gasoline could become economical independent of mandates, causing ethanol production to continue apace.

Brazil’s Ethanol Industry

The United States is not the only country to aggressively pursue biofuel production in recent years. Europe has also expanded its biofuels sector, and Brazil has successfully made ethanol a major fuel source by utilizing sugarcane as a feedstock. In the 1970s, Brazil began to integrate ethanol into its fuel supply in response to high oil prices. Currently, the country can meet its entire domestic fuel needs and is one of the world’s largest ethanol exporters. However, Brazil would not be able produce enough ethanol to supply the entire U.S. market should U.S. corn-based ethanol production decrease significantly.

Significant differences between sugarcane- and corn-based ethanol production have made the Brazilian biofuels industry more efficient than that of the United States. Brazil’s tropical climate allows for a year-round planting season, increasing the supply of the industry’s raw starting material, while the temperate climate of the United States limits its corn-growing season. Sugarcane ethanol production also requires one fewer step than corn ethanol production as sugarcane starch does not need to be broken down, making it a more efficient feedstock. Additionally, while both corn and sugarcane are used for human consumption, corn is a staple crop, while sugar can more easily be eliminated from diets during times of short supply.

Both countries are looking to advanced cellulosic ethanol technologies, which would eliminate the need to use food sources for ethanol production. Currently, the processing costs of cellulosic ethanol have kept the fuel from becoming commercially viable. Though demonstration plants are in operation, there are currently no commercial-scale cellulosic ethanol production facilities in the United States. Corn starch presently remains the only viable feedstock for the U.S. ethanol industry, and until cellulosic ethanol production advances technologically, the United States will continue to use corn — a global food source — to produce transport fuel.

The Importance of Corn

Corn has been hit especially hard by drought in 2012. The U.S. drought is expected to reduce corn crop yields by 3 percent compared to 2011 while global corn trade is expected to drop by 8 percent. As prices continue to rise and the drought continues, concerns over the U.S. ethanol mandates have increased both domestically and internationally.

Biofuel production has been only one contributor to the gradual trend of rising food prices over the past decade. The U.N. Food and Agriculture Organization’s food price index increased by 300 percent from 2000 to 2012, roughly the same period that the United States has been scaling up ethanol production. However, food prices are vulnerable to several factors, including population growth, financial speculation, government policy shifts, changes in consumption patterns, and adverse weather events.

Since more than 30 percent of corn produced in the United States is used for livestock feed, rising corn prices will also likely contribute to higher meat prices in the future. While ethanol and feed compete for corn in times of short supply and high prices, it should also be noted that distilled grains, a byproduct of ethanol production, can be used as a feed supplement.

U.S. corn production also has a global impact. The United States exports more than 10 percent of the corn it produces, so increases in corn prices will affect countries that import significant amounts of the crop to fulfill dietary requirements and feed animals. However, government subsidies and other mitigating factors can lighten the initial impacts of high prices.

The United States, Mexico and France met Aug. 27 to discuss potential options to mitigate food crises caused by the drought. In early August, the head of the Food and Agriculture Organization called for an immediate temporary suspension of U.S. ethanol mandates to make higher amounts of corn available for food and livestock feed, but no commitment on taking such action has emerged.

A drought year highlights the numerous forces influencing food prices, both in the near and longer terms. U.S. ethanol production is one such long-term factor, but the current drought is more to blame for the ongoing rise. Poor U.S. corn crop yields will inevitably have a wide global impact due to the U.S. role as an exporter. Mandates that reserve some corn for fuel production will continue to face scrutiny until a technological shift removes the competition between corn’s use for food or for fuel.

This article – courtesy of Strafor – click here for more info

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