End of tax perk to tip corn ethanol into decline

by Agrimoney.com

Leading academics have called time on growth in the US ethanol industry, forecasting that the sector will contract next season, in a report pegging the country's corn crop lower than official estimates.

The run of uninterrupted growth in consumption of US corn for making ethanol, which has grown from 996m bushels seven years ago to approaching 5m bushels, will end in 2011-12, the Food and Agriculture Policy Research Institute (Fapri) said.

The institute, in a report to the US Congress, forecast corn use by ethanol plants falling to 4.6bn bushels, a decline of 5.5% on its own estimates.

Growth thereafter would be pedestrian, growing by an average of 100m bushels a season to 2020-21, a level "modest compared to recent history".

The outlook is considerably more downbeat, for the short-term, than that of the USDA itself, which last week forecast ethanol use of corn growing next season to 5.0m bushels.

Waning growth 

Fapri's projection assumes an end to US tax credits on biofuels which were, for bioethanol, renewed for this year against significant political opposition, and which hardened this year as the industry was blamed, amid record food prices, for taking acreage away from edible crops.

Broker US Commodities noted two weeks ago that "even the strongest ethanol supporter, Senator [Chuck] Grassley from Iowa, indicated he would vote for a balancing of the [US] budget versus supporting biofuels".

The tax assumption "matches that" used by America's independent Congressional Budget Office, Fapri said.

They also signal weaker returns for ethanol producers, with net operating returns from wet mills, in which water is used to break down corn kernels, by 21% to $0.29 per gallon.

Dry mills - typically smaller operators, which account for a minority of ethanol consumption - will see returns fall by 10% to $0.38 per gallon.

Stocks to rebuild

The forecasts came as Fapri unveiled crop forecasts for the next decade, including estimates for corn of 91.0m acres in sowings, 1.0m acres below USDA estimates.

The harvest will come in at 13.76m bushels, 125m bushels shy of the official forecast, Fapri said, terming the harvest yield "critical to world markets".

"The unexpected drop in US corn yields in 2010 is a major reason for higher world grain prices," Fapri said.

Nonetheless, with ethanol use slowing, the institute forecast ending stocks rising to 1.25bn bushels aty the end of 2010-11, significantly higher the USDA estimate.

Upbeat wheat outlook

The institute estimated soybean sowings at 78.0m acres, in line with the USDA figure.

However, it pegged harvested wheat acres, at 49.6m acres, 2.1m acres above the official forecast, saying "projected net returns to wheat producers remain strong enough to maintain wheat acreage above the 2010 level".

The US wheat harvest this year was estimated at 2.22bn bushels, 140m bushels higher than the USDA estimat

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