Biofuel Production: Slowdown Ahead?

As corn and soybean prices hover around record prices, our nation continues to debate food vs. fuel. In fact, Governor Rick Perry of Texas is asking the Environmental Protection Agency to create a one-year, 50-percent waiver on the state's ethanol mandate, dropping it from 9.0 billion to 4.5 billion gallons. Others are calling for the temporary removal of the $0.46 per gallon import tariff on Brazilian ethanol. Either of these actions would have a dramatic impact not only on corn but other food-based commodities.

What is the likelihood of either action? On July 22, the EPA delayed an announcement on the 50-percent waiver until mid-August. It is our feeling the EPA will delay making a decision on the waiver until after the corn harvest, to see if the market price corrects itself based on fundamentals.

If Congress removes the import duty on Brazilian ethanol, the #11 world raw sugar contract could jump to match the price spike in 2005 after Hurricane Katrina, of $0.185 per pound. On the other hand, in that same scenario, corn prices should decline based on lower demand for corn-based ethanol.

Corn-based ethanol is a somewhat transitional biofuel in that the long-term success of the industry rests on cellulosic ethanol made from a variety of renewable crops as well as waste products. How long that transition lasts depends on how soon commercial production of cellulosic ethanol becomes feasible. Current industry estimates peg it at five to ten years, given that companies have to first build test plants and then construct larger, commercial production facilities. Range Fuels, in Georgia , is hopeful that they will be able to begin production at their 20 million-gallon facility in 2009.

When confronting higher commodity and food prices, we must keep in mind that biofuels are here to stay as part of the renewable fuels equation. What we can do is make the most intelligent decisions possible based on the information at hand and stay informed of industry trends and developments. For more information on this topic or to find out how our expertise may help you reduce costs, please contact us.

McKEANY-FLAVELL COMPANY, INC.