Biofuels still growing despite reduced profits

by Meyer Sosland
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Biofuel production has made a huge difference to the grain markets, but many biofuel producers are having trouble making a profit. Even so, there is still going to be more expansion.

"The bloom is off biofuels," said Dan Basse, president of Chicago, Illinois, U.S.-based AgResource, at the Global Grain 2007 Conference, held Nov. 21-23 in Geneva, Switzerland. "U.S. corn (maize) ethanol producers are either marginally profitable or negative at the moment."

Bob Steele, global wheat coordinator at Nidera, agreed. "Profits on biofuels in the U.S. are certainly going down," he said. "They’re not as profitable as people thought they were going to be."

Basse said the most significant problem in the U.S. biofuels industry is not the price of corn but the infrastructure. The industry has expanded faster than the availability of rail cars, pipelines or blending facilities. "We built all these ethanol facilities, but we never built the infrastructure to handle it," he said. "It’s going to take at least 12 to 24 months to build out the infrastructure to make ethanol as vibrant as it could be."

That means that U.S. biofuel producers’ options are currently limited. "The only way we can get rid of our biodiesel is by exporting it to the E.U. (European Union) in a splash-anddash program," he said.

With demand for ethanol slowing in China, Basse said it is not just a U.S. problem. "We are not the only ones that are somewhat choking on biofuel supplies," he said.

The E.U. needs biofuels to hold back its rising energy imports. "With business as usual, the European Union’s energy imports will increase from 50 percent now to 65 percent in 2030," said Kris Truyens, European sales manager for alternative fuel services at SGS. "Biofuels are the only large-scale alternative available for diesel."

The European focus is on biodiesel rather than ethanol. "In Europe especially, the increasing popularity of diesel cars plays a role," he said. "Europe is a diesel importer. Europe is short in diesel and long in petrol."

The food-versus-fuel debate means that, in the longer term, alternative crops like jatropha will become more important. "It can stand a very low quality soil and jatropha is used to fight desertification," he said.

The supply chain has to be managed closely to ensure quality. For example, ethanol is highly hygroscopic. "It’s very important to avoid water in the logistics chain of ethanol," he said. "High-quality biofuels need close monitoring along the entire value chain from field to fuel."

Hemeline Macret, analyst at Strategie Grains in France, predicted that E.U. ethanol demand would rise to 7.49 million tonnes by 2010-11, compared with a 2006-07 level of 1.53 million tonnes. However, the usage of wheat for ethanol in the E.U. would still be less than 10% of total animal and industrial use. "The variability of grain production according to weather events will have a much greater impact than biofuel demand," she said.

The picture is dramatically different for biodiesel. Biodiesel production is set to rise to 13.44 million tonnes in 2010-11, with a total capacity of 21.4 million tonnes, compared with 6.21 million tonnes produced from a total capacity of 6.21 million tonnes in 2006-07. "For biodiesel, the capacity of existing and planned factories is much higher than demand," she pointed out.

Strategie Grains’ estimate for demand for rapeseed is based on the assumption that the biodiesel producers will use 70% rape oil, falling to 60% in the southern part of the E.U.

To achieve the level of biodiesel production foreseen, Macret predicted a 50% increase in E.U. rapeseed production to 26.4 million tonnes by 2010-11. "We think that the decrease in set-aside and fallow land and the increase in rapeseed prices will lead to a sufficient increase in rapeseed area," she said.

Much of that could be done by putting part of the E.U.’s current set-aside land back into production, but not all of it. "We estimate that the minimum fallow is 3.5 million (hectares) in the E.U.-27," she said, comparing that with a 2007 level of 8.9 million hectares.

Even so, E.U. rapeseed oil imports are likely to increase sharply from 2008 onwards. "The rapeseed balance sheet will be very tight," she said. "Crushing capacity is not increasing as fast as rapeseed oil demand, so rapeseed oil imports will increase."

For wheat, Strategie Grains predicted a rise in total production from 112.5 million tonnes in 2007-08, based on a yield of 5.1 tonnes a hectare and an area of 22 million hectares, to 132.4 million tonnes in 2010-11, with an average yield, based on the trend, of 5.6 tonnes a hectare on 23.6 million hectares.

Even with demand for wheat for ethanol rising to 10.5 million tonnes in 2010-11, from 1.5 million in 2006-07, that would still leave the E.U. with 12 million tonnes of wheat to export. "This should lead to decreasing wheat prices," she said. "But that decrease should be limited by increased future demand."

However, Macret said biofuels are not the most important element in the wheat balance sheet. The variability of grain production, according to weather events, will have a much greater impact than biofuel demand.

Macret also pointed out that in the feed market, cereals would come under increasing pressure from the byproducts of biofuel production -- rapemeal from the biodiesel process and distillers dried grains from ethanol production. The supply of rapemeal is set to increase from 5.7 million tonnes in 2006-07 to 12.2 million in 2010-11. The total supply of DDGS is likely to reach 63.8 million tonnes in 2010-11, compared with around 1.3 million in 2006-07.

Emmanuel Jayet, senior analyst of soft commodities and biofuels for BNP Paribas in Paris, France, looks at the relationship between the grain and mineral oil markets as biofuels become increasingly important.

"Grain traders have had to increase their knowledge of other commodity markets in order to trade grains successfully," he said. "Biofuels are at the crossroads between the energy world and the food world. Biofuels are competing with fossil fuels."

Even with tax incentives or the legally binding incorporation rates or mandates required by some countries, biofuels are still in competition with mineral oil. "When you have a tax incentive, biofuels have an advantage. But there is, all the same, competition," he said. "Usually when you have a mandate, actual consumption is above the mandate." As an example, he used the U.S., where consumption of 4 billion gallons had been mandated in 2006, while actual consumption reached 5.4 billion.

When gasoline sold at $820 a tonne in mid-November, France’s 330-per-cubicmeter tax incentive meant that the maximum price for ethanol was $1,300 a tonne, he said. Even with the tax incentive, there is still a relationship between the prices. However, the correlation can

be affected by other factors. For example, logistical constraints on U.S. ethanol producers made it cheaper to use gasoline.

"It is often said that biofuels are sending agricultural feedstock prices through the roof," Jayet said. "It is true to the extent that biofuel producers can afford it."

But with biofuel production unprofitable, biofuel producers were not in a position to force prices higher. "Biodiesel producers in Europe are not making any money," he said. "It means that biodiesel producers cannot have bought these prices."

There is more likely to be a correlation if the biofuel accounts for a large share of the corresponding feedstock. For example, 60% of Europe’s rapeseed is used for biodiesel, and Jayet showed a close correlation between the price of biodiesel for Rotterdam barges and the E.U. rapeseed oil price. The same was true for Brazilian cane sugar, 50% of which is used to produce ethanol, with a close relationship between the price of anhydrous ethanol ex-mill in Brazil and sugar futures.

The correlation between U.S. ethanol prices and CBOT corn futures had developed as the proportion of the corn crop used for ethanol had risen from 11% in 2004 to 20% in 2006. European wheat, 1.1% of which is used for ethanol, showed no correlation, nor did Malaysian palm oil, less than 1% of which is used for biodiesel.

So far, there is no reverse correlation. "An oversupply of wheat is highly unlikely to impact the price of crude oil," he said. "This is a one-way effect."

Chris Lyddon is World Grain’s European editor. He may be contacted at: