March 8, 2007

Ethanol boom firms grain prices
 

 

Changes in climate and energy security are beginning to underwrite world grain and oilseed prices as governments increase subsidies and mandatory targets for bio-fuels.

 

The use of corn in ethanol production in the US is tipped to reach 80 million tonnes this year, consuming about 30 percent of the entire US crop.

 

Australian Bureau of Agricultural and Resource Economics (ABARE) commodities manager Vince O'Donnell said the promotion of alternative fuel sources by governments in the US, Europe and China would continue to boost most grains prices over the next five years.

 

Coarse grains such as barley and corn, and oilseeds such as canola can be used for production of fuels such as ethanol and biodiesels, which are being promoted to compete with Organization of Petroleum Exporting Countries (OPEC) producers and for their lower greenhouse gas emissions.

 

The use and development of these fuels was relatively low in Australia, O'Donnell said, but grain growers recovering from the drought could expect export prices to hold and improve with strong global demand.

 

Demand for grains and oilseeds are expected to increase driven largely by increasing demand for use in the production of biofuels, said O'Donnell.

 

Ethanol has become a major driver of course grains demand, with 100 operational plants in the US producing 20 billion litres and another 73 under construction, he said.

 

ABARE has previously projected that existing biofuel technology would require a sustained world oil price of more than A$55 (US$71) a barrel to make ethanol production competitive.

 

Without sourcing alternative feedstocks, the effect of major mandatory biofuel targets will be to cannibalise food crop production.

 

The US government announced plans earlier this year to reduce petrol usage by 20 percent within a decade in exchange of biofuels. In his State of the Union speech last month, US President George W. Bush said domestic ethanol and alternative fuel output was expected to reach 160 billion litres a year by 2017.

 

Europe has mandated 2 percent use of biofuels, rising to 5.75 percent by 2010, estimated by the International Energy Agency (IEA) to require 20 percent of Europe's cropland area be diverted from food to fuel.

 

The IEA predicts that 43 percent of US crop production would be needed to meet 10 percent of its automotive and diesel fuel demand by 2020.