Monday, March 01, 2010
Can We Rely On Ethanol And Biodiesel To Drive Market Demand?
The biofuels market has some significant challenges. If you are making farm management decisions, farm marketing decisions, farm land purchases, or anything that depends on premium commodity prices stemming from ethanol and soy-diesel, should you carry out those plans? After all, the tax credit for biodiesel has expired, and ethanol is being challenged by California policy and the EPA climate change policy. Do you bet on ethanol and biodiesel at this point?Yes, you do, say USDA’s economists, who assembled a long term projection for corn and soybean oil use in biofuels. The projection was released recently at USDA’s Outlook Forum and estimated world and US energy prices, biofuels production, and the quantity of feed grains and oilseeds being processed for biofuels. Kansas State University ag economist Dan O’Brien analyzed the USDA projects in his report on the Outlook Forum in mid-February. While USDA economists assumed that policies in effect last fall would continue in place, they projected that demand for biofuels would continue and the value of agricultural commodities and cash receipts for farmers would continue to grow through 2019.
O’Brien quotes USDA as saying, “Although increases in corn-based ethanol production in the United States are projected to slow, ethanol demand remains high and affects production, use, and prices of farm commodities throughout the sector. Expansion of biodiesel use in the EU raises demand for vegetable oils in global markets.” The USDA economists make several assumptions as the basis for their projections:
1) US economic growth over the next 10 years will be 2.5% to 2.7%, and global economic growth will average 3.3%.
2) The value of the dollar will depreciate relative to the Euro and Yen and result in some rebalancing of currency portfolios. They say a continued recession will reduce global dependence on the dollar as a substantial currency, and they add, “For agriculture, implications would depend on how weaker economic growth and demand gains in the developing economies would trade off against a sharply lower dollar in influencing agricultural trade.”
3) Crude oil prices are expected to increase as economies recover, and reach $100 per barrel by 2019.
4) Biofuel policy is expected to retain the 45¢ per gallon tax credit to ethanol blenders, the $1 per gallon tax credit for biodiesel, and the 54¢ per gallon tariff on imported ethanol. Ethanol will account for 34-35% of corn use, with corn being the primary feedstock for ethanol production. Biodiesel production will increase to 1 billion gallons by 2012.
5) International biofuels production will increase in the EU, Brazil, Argentina, and Canada, with European growth in biodiesel demand being the key factor for global demand for vegetable oils and oilseeds.
6) Prices for corn and oilseeds will continue at historically high levels through 2019, helped by US demand for ethanol and EU demand for biodiesel. This will cause US net farm income to remain at higher levels.
Expansion in the ethanol industry will slow, but recent expansion will be fully utilized. The high demand by ethanol refiners and global importers will keep corn demand high, and ethanol will push corn consumption to 5.025 bil. bu. by the 2019/2020 marketing year. Feed use of corn will bottom out in the initial years from declining livestock feeding and increasing reliance on DDGS.
Expansion in the biodiesel industry will boost soybean oil demand by 2.9 bil. lbs during the 10 year period, which would represent 13-15% of total use and annual production of nearly 400 mil. gal. of biodiesel
Summary:
These long term projections for 2010 through 2019 in U.S. agriculture indicate that growth will continue to occur in both the use of corn for ethanol and in the use of soybean oil for biodiesel.
Changes in U.S. energy and/or environmental policy could significantly impact these projections either positively or negatively, as could changing macroeconomic or energy market conditions. These long term projections serve as a benchmark for comparison as more information becomes know with surety by the U.S. grain and bio-energy markets.
Posted by Stu Ellis on 03/01 at 01:10 AM | Permalink