LONDON (Reuters) - A sharp decline in wheat prices driven by a supply glut is set to lead to more of the grain being turned into motor fuel in the European Union.
Demand for bioethanol, a renewable substitute for petrol normally made from either grains or sugar crops, is increasing in the EU. It is seen as a way to reduce emissions of the greenhouse gases believed to contribute to climate change.
Wheat is now in pole position to help meet the demand with the price of alternative feedstock sugar rising to the highest levels in nearly three decades earlier this month and sugar-derived bioethanol imports from Brazil on the wane.
"Those plants that are flexible in the processing could switch to wheat and get a very cheap feedstock," said Rob Vierhout, secretary general of the European Bioethanol Fuel Association (eBio) in Brussels.
Wheat futures have fallen sharply to contract lows in Paris during the last few weeks, depressed by larger-than-expected harvests in both France and Germany.
For a graphic on the relative price trends in wheat and sugar in the last few weeks click on:
Wheat was the most important feedstock for bioethanol production in the EU in 2007, the most recent year for which a breakdown is available, with a 39 percent share. Grains (including barley, maize and rye) accounted for two-thirds, according to eBio statistics.
That total should rise significantly.
Ensus should bring on-line later this year the largest biorefinery in Europe in north-east England which will use about 1.1 million tonnes of wheat to produce about 400 to 450 million liters of bioethanol.
In 2010, Vivergo is due to bring on-line a similar size plant in eastern England which is also expected to use wheat as its main feedstock.
Ensus is owned by two U.S. private equity funds, the Carlyle Group and Riverstone, while Vivergo is a joint venture owned by British Sugar, BP and DuPont.
"I can well expect that more grain will be used (to produce bioethanol) as it can now be bought very cheaply," said Frank Bruehning, spokesman for the German biofuels industry association VDB.
Vierhout of eBio said that bioethanol demand in the EU should rise this year to more than 4.0 billion liters, up from about 3.5 billion last year, as EU countries use more biofuel.
"Targets in most of the countries are going up year by year and there is less supply from Brazil. Those two (factors) will make sure we have more capacity being utilized," he said.
EU biofuel demand is driven mainly driven by political targets rather than the price of oil.
The European Union had directed that 10 percent of transport fuel must come from renewable resources by 2020 and several member states have set interim targets.
Brazilian shipments to the EU are falling partly due to strong domestic demand which cut the amount available for export. There has also been a switch in Brazil toward using more sugarcane to produce sugar, rather then bioethanol, sparked by a sharp jump in prices for the sweetener.
"Given the price of sugar, there will be a certain shift toward sugar (in Brazil), which should give a lift to the ethanol market," said Alain Jeanroy, director of sugar beet growers group CGB and coordinator of an ethanol industry group.
Brazilian ethanol exports to European countries from January through June this year totaled 557,000 liters, down from 726,000 liters in the same period last year.
For the EU's bioethanol industry to continue to thrive it will not, however, only have to compete on price. It must also prove it can contribute to the fight to stem climate change.
Brazilian bioethanol has been shown to substantially reduce emissions of greenhouse gases as compared to mineral oil and has set a standard the European industry must seek to match.
"Today you get the best sustainability and good pricing out of Brazil. It is not just down to availability," said Andrew Owens, chief executive of UK biofuels company Greenergy.
Vierhout accepted the challenge.
"If it (price trends) will continue like this and we can demonstrate the bioethanol we use is sustainable, I think it (the future) looks promising," he said.
Additional reporting by Michael Hogan in Hamburg, Gus Trompiz in Paris and Inae Riveras in Sao Paulo; Graphics by Catherine Trevethan; Editing by Peter Blackburn