ANALYSIS - Corn Alone can't Meet Bush Green Fuel Goal
Date: 25-Jan-07
Country: US
Author: Sam Nelson
"It's a very optimistic scenario and encouraging longer term, but it's too big to make any sense for ethanol from corn only," said Jerry Gidel, analyst for North America Risk Management Inc.
Additionally, US grain markets will be extremely volatile, led by explosive price bursts in corn, which already is at a 10-year high, as the corn-based ethanol engine forages through the US heartland.
Bush, in his State of the Union address on Tuesday night, called on the nation to derive 35 billion gallons of fuel needs from renewable green sources such as corn and ethanol by 2017 and reduce gasoline consumption by 20 percent.
Ethanol factories already are springing up across the US heartland at an alarming rate, which will strain the ability of farmers to produce enough corn for fuel and food over the next year or two, much less in ten years.
"There was nothing new for us, a year ago it was kind of an innovative thing to talk about but not today," said Don Roose, president and analyst for US Commodities, Des Moines, Iowa referring to Bush's remarks about renewable fuels.
"He's talking about renewable fuels coming from sources other than corn, like switch grass or wood chips, and there is no plan ahead on how to handle all of that," Roose said.
US farmers produced 10.5 billion bushels of corn last year versus the record large 11.8 billion two years ago. And the US Department of Agriculture has earmarked 2.15 billion bushels of the 2006 crop to be converted into ethanol, which will slash the stocks of corn over half to 752 million bushels near the end of the year.
US ethanol production in 2006 was roughly 5 billion gallons and Gidel said given ideal crop growing conditions and expanded corn acreage, a maximum of roughly 15 billion gallons of ethanol could be produced from corn alone.
"There is no way 35 billion gallons of ethanol is going to come from corn. That would take 12.5 billion bushels of corn, that's more than the total supply of corn and takes away all of it from exports and livestock...and we aren't producing that much corn so it's a reality scenario that's not good," Gidel said.
MARKETS UNIMPRESSED
Bush's vision, while endearing to some, was greeted with a thud among investors in the crop as corn prices plunged nearly 2 percent on Wednesday at the Chicago Board of Trade, the world's largest grain futures exchange.
"We brought a lot of longs in here yesterday, and they're leaving," a CBOT grains trader, said referring to the slide in prices after the investment fund buying on Tuesday rallied the market. "The big picture hasn't changed, but I think everybody looked for more of a boost on the ethanol story," he said.
Roose said corn prices would remain extremely volatile and wouldn't rule out the potential for prices to rally above current price levels of around US$4.00 per bushel or the ten-year high of US$4.20-1/2 per bushel that was set a week ago.
"It's kind of two steps forward and one back right now. The market sets back but funds keep buying it. The price is going to have to get to a point where we ration demand to protect our food security," Roose said.
Ethanol company stock prices also faltered on Wednesday.
"Pacific Ethanol shares have run up considerably going into the State of the Union address as investors anticipated President Bush to speak about ethanol in a positive way," said William Lefkowitz, options strategist at brokerage firm vFinance Investments in New York.
"Today, we are seeing profit taking in the shares of the ethanol producer and some put buying as investors anticipate that the declines might continue," he said.
Pacfici Ethanol Inc. stock share price was down 7 percent; Verasun was down 3.7 percent; Aventile Renewable Energy holdings Inc. down 7 percent and Archer Daniels Midland, down 3 percent.
(Additional reporting by Doris Frankel and Julie Ingwersen)
