June 11, 2008

  

Biofuel backlash may hurt corn
 

 

A "backlash" against use of corn as a biofuel feedstock could be bearish for corn prices, while providing modest support for sugar prices as sugarcane may emerge as a more acceptable biofuel feedstock, said a Barclays Capital report released last week.

 

The report in a book form - "The Commodity Refiner, Summer 2008" - said that "there is something of a backlash against the current generation of biofuels and this has been given added impetus by growing evidence of how little the use of biofuels cuts emissions."

 

It said the backlash may take the form of freezing the US ethanol mandate at current levels of 9 billion gallons annually, which would be bearish for corn prices, as 30 percent of total US corn production is now used as ethanol feedstock.

 

On the other hand, it may give a modest boost to sugar prices, as other countries, such as India, will likely increasingly use sugarcane as a feedstock for biofuels, at a time when sugarcane output is likely to be lower on-year due to low prices.

 

However, the report added that apart from any backlash in biofuel use, the fundamentals of corn are rock-solid bullish for the marketing year to Aug. 31, 2009.

 

An expected decline in global corn output this year and rising demand, especially in China, could provide significant support to corn prices, it said.

 

Barclays estimates the average corn price in 2008-09 will be around US$6.30 per bushel compared with US$4.30/bushel in 2007-08.

 

In other grains, Barclays said the outlook for soy remains bullish, as rising demand and tight stocks may outstrip an expected rise in global soybean output in 2008.

 

"China remains the key demand dynamic in light of its position as the world's largest soy consumer and importer," said the report, adding that Chinese demand will continue to rise as incomes and protein intake rises.

 

The report said that wheat prices have a "modest downside risk" in the 2008-09 marketing year ending June 30, 2009, as the bumper global wheat harvests expected are likely to be partially offset by strong consumption and low stocks.

 

Global wheat consumption will likely touch an all-time high of 642 million tonnes, up 3.5 percent on-year, led by the increasing wheat supply as well as greater use of wheat as animal feed, as corn and soy become more expensive, it said.

 

Barlays expects the 2008-09 wheat price to average US$6.80/bushel, down from US$8.60/bushel in 2007-08.