August 11, 2008

EPA waiver decision could provide support to ethanol, corn

A government decision to deny Texas' request to halve the national volume requirement for the Renewable Fuel Standard is seen as a positive factor for the beleaguered ethanol industry.

Stung by historically high corn prices, the ethanol industry is poised to benefit from the US Environmental Protection Agency decision, largely seen as a signal of revived governmental backing in the midst of the food-versus-fuel debate. Corn, too, could potentially cash in on the decision by securing long-term price support.

"I personally think it indicates that while they're concerned about the food-versus-fuel debate, the greater concern is high fuel prices," said Heather Jones, an ethanol analyst for BB&T Capital Markets.

After Thursday's decision, biofuel demand should remain strong as the incremental increases in ethanol production mandated by the RFS remain intact, said Jones.

"There's a pretty substantive increase in demand through 2015," said Jones. "That demand is not going to go away per the decision yesterday, so, that should be generally supportive [of ethanol prices]."

The RFS mandates that 15 billion gallons of renewable biofuels be sold or introduced into commerce by 2015.

Ron Oster, an ethanol analyst for Broadpoint Capital Inc., said the ethanol industry received the decision with a "sigh of relief."

"It lends credibility to the fact that ethanol is not the big driver of why corn prices have surged," he said.

High world food prices have led to criticism of production of alternative fuel from crops such as corn. But the EPA said that even under scenarios in which waiving the renewable-fuels requirements might lower ethanol production, the decrease in corn prices would only be small -- about 30 cents a bushel.

Oster said he was uncertain whether the decision would have an immediate effect on prices and declined to offer long-term price outlooks.

"While expected, this is very positive [for the ethanol industry]," said Brian Jennings, executive vice president of the American Coalition for Ethanol (ACE). The ACE is a grassroots, nonprofit organization originated to promote and expand development of the ethanol industry.

The decision shows that the federal government remains committed to "growing the use of biofuels," he said. Jennings declined to comment on the specific impact the decision would have on ethanol prices but said "the long-term economics look good" for the industry.

As of late, the ethanol industry has seen rough times. Historically high corn prices have put a dent in ethanol companies' earnings and devastating Midwest flooding in early June exacerbated the situation by destroying large swaths of cropland. Corn prices peaked near $8 a bushel in late June due to the flooding, but have since declined to just above $5 Friday.

In response to previously high prices, VeraSun Energy Corp (VSE), one of the largest publicly traded ethanol companies, put three newly constructed facilities on hold. Others, such as Abengoa SA (ABG.MC) and Altra BioFuels, shut down plants that were already producing. VeraSun has since started production at one of the three idled facilities.

"In any industry, it's important to have some certainty," said Nathan Schock, director of public relations for POET Energy, a privately held ethanol company. "This [decision] gives the ethanol market that."

"Most people expected that this waiver request would be denied, but I think the [ethanol] market was given some confidence with the force with which the EPA denied the request."

The EPA decision could also provide long-term support to corn prices.

"By not acquiescing to Texas' request for a waiver, that would seem to limit any other states asking for a waiver as well," said John Kleist, analyst/broker at Allendale Inc.

This will bolster ethanol demand and correspondingly support corn prices "to a huge degree," Kleist said.

The US Department of Agriculture estimates that 3.95 billion bushels of corn will be used for ethanol production in 2008-09.

BB&T's Jones said the decision is "generally supportive of grain prices" as long as both crude-oil prices and the US dollar stabilize.

Voicing a similar sentiment, Ron Litterer, president of the National Corn Growers Association, said corn prices could find some long-term support from the EPA decision if crude-oil prices break.

Corn was trading lower Friday (August 8) due to a strong US dollar and favorable growing weather in key US crop areas. The December contract at the Chicago Board of Trade settled down 23 3/4 cents to $5.18 1/4.

Although prices traded sharply lower Friday, the EPA decision is still the "six-hundred-pound gorilla in the room," said Kleist.

"At some point, it becomes a major consideration," said Kleist. "You can't look at it in the perspective of today."

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