World Grain - November 2009 - 14

newsreview
Study finds ethanol economics improving
LONDON, ENGLAND - Declining grain
prices are dramatically improving the economic viability of the ethanol industry,
according to a report from Rabobank released Oct. 2.
Capacity utilization in the U.S. and
the E.U. is expected to increase through
the rest of this year and into 2010. It's a
welcome change for producers who have
struggled to earn a profit the last 18 months
due to high feedstock costs and depressed
end-product prices.
The report said ethanol producers were in
the red for most of 2008 and the first half
of this year, which resulted in a reduction
in feedstock demand as plants were closed,
mothballed and reduced operating capacity.
But in the last three months, the economics of U.S. ethanol production has improved,
thanks to declining corn prices. Since early
June, corn prices on the Chicago Board of
Trade (CBOT) have fallen 28.5% while
crude oil prices have remained flat. At the
same time, CBOT ethanol futures have increased 2%. Natural gas prices, a major cost
for U.S. producers, have stayed well below
mid-2008 levels, helping improve the variable cost structure.
Capacity utilization has increased in recent months and mothballed plants are coming back online, the report said. Construction
projects for new plants are being resurrected
with 15 new or expanded plants expected to
come online in the coming marketing year.

An ethanol production plant in South Dakota. Photo by Jim Parkin.
The Renewable Fuels Association estimates the new capacity amounts to 1.5 billion gallons, or 555 million bushels, of additional corn demand.
If current production capacity utilization
remains at 11.53 billion gallons, total corn
use in 2009-10 will be 4.271 million bushels.
Rabobank said if the status quo for margins
persists, U.S. corn use for ethanol could increase from 3.675 million bushels in 200809 to 4.3 million bushels in 2009-10.
E.U. ethanol capacity utilization also is
expected to increase significantly in 200910. Since May, there has been a divergence
between ethanol feedstock prices and E.U.
ethanol prices.
E.U. ethanol prices have increased 26%
since May, while wheat prices have fallen
18%, the report said. Given the heavy sup-

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ply/demand balance in the E.U. and global
wheat markets, Rabobank said feedstock
prices should remain competitive relative to
ethanol over the next 12 months.
Total grain use for biofuel production in
the E.U. is expected to increase from 5.63
million tonnes in 2008-09 to 9.06 million
tonnes in 2009-10.
Even though margins have improved,
the situation is dynamic. Changes in any of
variables - ethanol and grain prices - can
significantly alter marginal returns and the
willingness of plant operators to increase
production.
"Producer profitability is not the only
factor in the ethanol equation; blending
economics will also play a key role in determining whether demand will rise above
mandated levels," the report said.

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World Grain - November 2009

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