Analysis: Ethanol to edge pigs for corn use, but not quite yet
WASHINGTON/CHICAGO (Reuters) - Ethanol appears almost certain to win the food-versus-fuel contest in the United States. But not just yet.
The Agriculture Department forecast that a tad more corn will be used to make ethanol than to feed livestock this year may be a false milestone: ethanol makers say they won't use that much corn while producing a record amount of the biofuel, hewing to a more efficient conversion rate.
More important, the USDA's projection that corn for ethanol will rise 2 percent in the new year is contrary to widespread estimates that ethanol output will fall with the imminent removal of a $6 billion tax break, ending five years of explosive growth for the sector and providing brief relief to a strained global corn market.
The Food and Agricultural Policy Research Institute (FAPRI), a University of Missouri think tank, projects a 5 percent drop in ethanol output in the year beginning on September 1, "a little bit of a dip relative to what would happen otherwise", said director Pat Westhoff.
With the loss of the 45-cent-a-gallon excise tax credit, FAPRI says output would fall, rebound after a year and then grow more slowly in the future. The ethanol market is highly sensitive to prices, and high oil prices have ethanol sales running far above the federal mandate for use of biofuels.
Even that relatively small amount of extra corn could benefit a market facing bare-bones inventories. Some 870 million bushels, a three-week supply, are expected in U.S. grain bins when the autumn harvest begins in 2012.
Tight supplies in the United States, the world's top corn grower, put the corn market on the boil months ago and assured additional scrutiny for USDA forecasts. Traders routinely debate whether the USDA, in its projections, makes sufficient allowance for factors such as the fate of the ethanol credit.
The tax credit, which helps ethanol compete on price with gasoline, is scheduled to expire on December 31. An agreement among key senators would end it as early as July 31.
Loss of the credit would narrow the profit window for ethanol and discourage production when ethanol costs about as much as gasoline.
Foodmakers and livestock producers, who blame ethanol for driving up feed costs and helping to inflate food prices, will be happy to see it go.
Food "is taking second place to putting ethanol derived from corn into America's gasoline tanks", said Bill Roenigk, a top official in the broiler chicken industry.
HIGH OIL PRICES, EXPORTS GIVE ETHANOL A BOOST
A different outcome is possible -- high oil prices and large exports, which spurred production this year, could keep ethanol on the growth path in 2012 and require more corn for its production.
Output is headed for 13.7 billion gallons this year, according to Energy Department data, well above the federal mandate to use 12.6 billion gallons.
"If exports remain high ... then 2012 production will easily exceed 14 billion gallons," said Wally Tyner, Purdue University agricultural economist and biofuel analyst.
A factor in Tyner's projection is the Renewable Fuels Standard, which guarantees a share of the motor fuel market for biofuels. The mandate rises to 13.2 billion gallons in 2012, up 5 percent from this year.
The Renewable Fuels Association, a trade group, also says 14 billion gallons are possible in 2012 if exports are strong. "The possibility does exist to see less production next year as a result of this rush to slash ethanol investment," a spokesman said.
U.S. ethanol exports could hit 1 billion gallons this year as high sugar prices and the rising real have slashed exports by Brazil, which uses sugarcane as its ethanol feedstock. Brazil is No.2 to the United States in the fuel. Some 400 million gallons of U.S. ethanol were exported last year.
QUIRKS OF MATH, LONG-TERM WINNERS AND TIGHT STOCKS
While the long-term trend is clear -- ethanol makers and livestock feeders will each use roughly 40 percent of the U.S. corn crop in coming years -- there is disagreement over whether parity will arrive this year, next year or later.
Corn exports, meanwhile, will be limited to around 2 billion bushels a year, or 15 percent of the crop.
FAPRI estimates corn use for ethanol and for feed will be almost identical from 2014 for the rest of the decade.
The USDA says ethanol will nose out livestock as the top corn user by 50 million bushels out of 10.05 billion bushels consumed in the year ending on August 31. Ethanol would have a 100-million-bushel edge in the new marketing year.
Ethanol prices are sufficiently below gasoline to make production profitable even without the fuel tax credit, USDA chief economist Joe Glauber said.
Ethanol makers say the USDA is attributing too many bushels to them, so livestock remains No.1. The RFA trade group says the industry distills 2.77 gallons of ethanol from each bushel, while the USDA uses a yield factor of 2.7.
Using the RFA's conversion rate, 4.95 billion bushels of corn are needed to produce the projected 13.7 billion gallons in the year to August 31, compared to the USDA's estimate of 5.05 billion bushels for ethanol and 5 billion for livestock.
The RFA also points out that one-third of each bushel of corn that goes through an ethanol plant is converted into a byproduct called distillers' dried grains, which is fed to livestock. By that measure, ethanol would consume only 3.3 billion bushels of corn this marketing year.
The differences among the various estimates, ranging from 50 million to 100 million bushels in a year, are small -- less than 1 percent of domestic use. To parse among them implies a precision beyond reach. The USDA assigns a 9 percent margin to its July projections of domestic corn use, for example.
"In the end, what really matters is corn stocks are exceptionally tight," said analyst Mark McMinimy of MF Global. Considering the uncertainties over this year's late-planted corn crop, a discussion about a small portion of corn use will not materially change the supply-demand situation, he said.
(Editing by Dale Hudson)
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