Our reporter Sean Pratt has just completed a report that is a cautionary tale for Canadians who want to build biofuel plants.
In the report that will appear soon in the paper, he writes that reduced tax incentives are troubling Europe’s biofuel industry.
The report was fresh in my mind as I read the U.S. Department of Agriculture domestic and world crop production and use outlooks last week.
One number of note was a reduction in the USDA’s forecast for corn used in ethanol, to 3.3 billion bushels for 2007-08.
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The number still towers over last year’s 2.125 billion bu., but was down 100 million bu. from its forecast the previous month. Michael Swanson, an agricultural specialist with Wells Fargo’s economics department, felt that was the biggest news in the USDA report.
His paper can be found at www.wellsfargo.com.
He argues the ethanol industry’s expansion simply isn’t sustainable with $3.50 to $4 US per bu. corn. If the current weakness in the U.S. economy continues, reducing the demand for motor fuel, recent gains in crop prices across the board could look shaky.
“If the ethanol-gasoline spreads continue to deteriorate, ethanol producers will not be able to pay more than $2.75 per bu. for corn and make money in ethanol,” Swanson wrote.
“Since ethanol demand is the only explosive growth factor in agriculture, this will change the tenor of the entire agricultural complex. All other agriculture demand continues to be incrementally based on population.”
He notes that the U.S. ethanol market appears to be oversupplied. Ethanol futures prices fell this summer, even as oil prices climbed.
Swanson argues that poor profitability in ethanol manufacturing could cause inefficient plants to stop production and slow the entry of new plants, which would further reduce corn demand.
The result: the battle between wheat, oilseeds and corn for seeded acreage next spring might be less frenzied than what many expect today.
