Are ethanol and biodiesel going to make money for farmers?
The answer is a resounding yes if farmers stick to farming, but it is only a tentative maybe if they invest in biofuel production plants, analysts at the Grain World conference said.
“Growing the crop (is where the profit will be),” said Nancy DeVore of Bunge Global Agribusiness, a biodiesel industry analyst.
“In the end, the incentives that the government provides, any mandates, get passed all the way through the chain, and the bottom line is land values. That’s the long-run holder of the extra price.”
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DeVore and Ross Korves of the ProExporter Network said the profit and loss potential of biofuel plants vary widely depending on the price of fossil fuel oil and the price of feedstock crops.
“At $40 US per barrel, you pretty much need to have subsidies across the board, unless the feedstock cost is a lot lower,” said Korves, who is an ethanol expert.
“At $50 a barrel, particularly on the ethanol side, you’re in pretty good shape, but you struggle much more on the biodiesel side. Biodiesel needs $60, a lot more than the ethanol people do.”
The volatility of oil prices in the past two years has flummoxed biofuel promoters and producers. At close to $80 per barrel, where oil prices were less than a year ago, biofuel plants would be profitable.
At $50 per barrel, where they touched recently, profit margins begin disappearing and many biodiesel producers would lose money. A price of $40 would cause large losses for almost all biofuel producers, who could survive only with the heavy subsidies the U.S. government now provides the industry.
“The difference between $50 and $60 is all the difference in the world,” said Korves.
DeVore said biodiesel producers on average lost money between mid-November and recently because of the increasing cost of producing biodiesel and the falling value of the fuel.
That should make hopeful biodiesel investors cautious.
“We’ve already seen profits normalize,” said DeVore. “That’s not where the (profits from the) mandates are going. It’s not going to the biodiesel producer, it’s not going to the grain or oilseed processor, it’s going back to the farmer in the land values.”
Fortunately for biofuel producers, oil prices have again reached $60 per barrel, something which Korves said has been important for morale.
“What’s happened in the last week or two has simply added to the (idea) that we are on the right track, that we have to push on,” said Korves.
Bank of Nova Scotia commodities market analyst Patricia Mohr said she hasn’t been surprised to see oil return to $60. To her, that’s the world’s “equilibrium price” for oil, matching supply with demand. Oil at $75 in present economic conditions is too high, but at $45 it’s too low.
She said $60 per barrel is enough to guarantee good profits for American producers but barely enough to guarantee Canadian producers a fair return on their capital. Higher financing and capital costs in Canada make margins thinner than south of the border.
Right now, government subsidies are key to biofuel industry sustainability, Korves said. He doesn’t expect them to disappear any time soon.
“Until there is some change in the strategic, global, economic, political environment, the U.S. government will be committed to ethanol in a substantial level,” Korves said.
