It'll Be Harder to Squeeze Profit from Ethanol

High corn prices could wipe out much of profit in ethanol industry for years to come, says FAPRI report.

Published on: Mar 16, 2007

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 2009-10, 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.