Wallace's Farmer, IA
03-16-07
It'll Be Harder to Squeeze Profit from Ethanol
Rod Swoboda rswoboda@farmprogress.com
Despite high crude oil prices and various policy incentives, profit margins in
bioenergy are expected to deteriorate. That's according to the Food and
Agricultural Policy Research Institute's 2007 agricultural outlook, released last
week. This decline is the result of high feedstock prices and progressive
elimination of unmet demand following a large expansion in capacity in
renewable fuels, say FAPRI analysts.
FAPRI is an economic research group with centers at Iowa State University and
the University of Missouri-Columbia. The projections incorporate recent
macroeconomic forecasts and currently adopted agricultural policies. The
institute prepares a set of 10-year projections for U.S. and international
commodity markets and presents the results at this time each year to the U.S.
Congress in Washington, D.C.
World ethanol price to fall in 2007
Following a large price increase in 2006 for ethanol, FAPRI expects the world
ethanol price to fall to $1.50 per gallon in 2007 in response to a 2.4% decline in
the price of crude oil, and with declining U.S. ethanol net imports. Projections
show the ethanol price continuing to fall throughout the decade, dropping to
$1.35 per gallon by 2016 as production growth outpaces growth in consumption.
Global net trade is projected to increase by 26.4% over the decade, approaching
1.3 billion gallons by 2016.
The 10-year outlook for the global economy is strong, with a 3.3% average
annual rate of real gross domestic product growth expected, despite crude-oil
prices exceeding $50 a barrel. Real GDP growth is projected to average 7.8%
per year in China and 6.9% per year in India. Income in East Asia is also
expected to grow strongly. In the coming decade, the U.S. dollar depreciates
(inflation adjusted) against the currencies of most consumers of U.S. exports and
competitors, with the exception of the Brazilian real.
Strong corn demand until 2009 to 2010
The world corn price increased dramatically in 2006-07, to $159.44 per metric
ton, because of demand from ethanol and livestock sectors and sustained
exports. FAPRI expects this increase in demand and price to continue until 200910, after which production growth catches up with growth in utilization.
Sanitary and phytosanitary issues continued to affect the world meat market in
2006. Although some recovery is assumed, opening of some markets has been
interrupted by suspected violations of strict new export standards. However,
FAPRI expects sustained income and population growth to lead to higher per
capita meat consumption.
Consequently, meat production is projected to reach 251.8 million metric tons
and trade grows to 22.8 million metric tons by the end of the decade. Recovery in
demand coupled with strong grain prices pushes all meat prices to high levels.
The outlook shows the US and Brazil gaining significant market share from their
2002-2006 base period.
Grain demand will push meat prices higher
Other highlights from FAPRI's 2007 world agricultural outlook: All world grain
markets were characterized by higher prices in 2006-07 because of supply
shortages and an increase in demand from the emerging biofuels sector.
* Wheat: The rise in world wheat price to $208.35 per metric ton came after
production losses due to adverse weather. The projected recovery in production
in 2007-08 meets the growing demand and therefore the price adjusts downward.
* Soybeans: Strong demand for protein and oil drives up world trade of
soybeans (+33%), soy meal (+29%) and soy oil (+43%) over the next decade.
World soybean production reaches 280 million metric tons by 2016-17.
Argentina, Brazil and the United States remain the dominant soybean trio,
accounting for 83% of world production. China, the world's largest importer of
soybeans, expands its import share to 55% of total world imports by 2016-17.
Palm oil remains the most widely used edible oil and world consumption is
projected to increase by 46% over the next 10 years.
* Dairy: Because of ample world supplies, world butter and cheese prices
decreased in 2006. In contrast, world milk powder prices remained high, with
strong demand in Asia and low exports from Australia and the European Union.
Steady growth in import demand, along with gradual growth in global supplies,
pushes world dairy prices higher initially and dairy production responds by
expanding in many countries. World dairy prices then taper in the mid-term, but
long-term income and population growth push prices back up. Australia, New
Zealand and the European Union remain the big players in export markets. As
Common Agricultural Policy reforms in the European Union affect exports,
Argentina and Brazil expand their dairy exports. The multi-year FAPRI
projections provide a starting point for evaluating and comparing scenarios
involving macroeconomic, policy, weather, and technology variables in world
agricultural trade. More information is available at the Iowa State
www.fapri.iastate.edu and University of Missouri www.fapri.missouri.edu FAPRI
Web sites.