June 11, 2010

US ethanol production rises, lifting corn demand

US ethanol refiners had notched up record output this year, helping increase corn demand, according to USDA report.

The agency lowered its estimate of this year's corn stockpiles 8% to 1.6 billion bushels.

The forecast illustrates how energy policy has become a wild card in global grain markets. US Congress has mandated blending more renewable fuels such as ethanol into petrol. US environmental regulators are reviewing whether to increase the cap on ethanol mixed in petrol.

Big corn processors have invested heavily in ethanol. "The US ethanol market has reached the point of saturation. Right now, the industry is producing more than the market can absorb," Archer Daniels Midland, corn manufacturer, said in a letter to the Environmental Protection Agency.

In contrast, the USDA suggested that there was more ethanol demand ahead as the US summer driving season soaks up production, a view shared by some analysts. Hussein Allidina, commodity analyst at Morgan Stanley, said: "If gasoline demand is increasing in absolute terms, the amount of corn that can be used ... will also increase."

The USDA also tripled its forecast for corn imports by China this year, to one million tonnes. Large purchases by China have been widely reported in recent weeks, so the estimate had not affected prices, analysts said.