3 commentsupdate:Feb 5, 2007
Ethanol Production
Guest Bloggers
In response to environmental restraints including
banning the additive MTBE, and Congressional tax incentives, ethanol production
from maize has expanded to the point that the energy industry is now in direct
competition with intensive livestock. By Simon
Shane
The escalation in the price of crude oil to above $70/barrel has stimulated
alternative production of fuel sources in the USA. In response to environmental
restraints including banning the additive MTBE, and Congressional tax
incentives, ethanol production from maize has expanded to the point that the
energy industry is now in direct competition with intensive livestock. Given the
E0.11/l tax concession to refiners to add 10% ethanol to petrol, and the current
net margin of over E150 from processing 1 m ton of maize, there is an increasing
rate of diversion of this feedstuff from poultry and swine
production.
Prof. Robert Wisner of Iowa State University estimates
that with projected areas planted to maize and with realistic yields, diversion
of maize will increase from 36 million m tons in the 2005/06 season,
representing 14% of production, to 62 million m tons for the 2008/09 harvest, or
24% of output. This increase is predicated on the documented orders for 40 new
ethanol plants to commence production by mid 2007, increasing supply from 20.0
billion liters in mid 2006 to a probable 40.0 billion liters in mid
2008.
Escalating demand without a proportional increase in supply of
maize, due to limitations on available land, will result in a rise in ex-farm
maize price from E87/ton in 2005/06 to E105/ton in 2008/09, given stable
domestic feed and food consumption and export demand. In the event of a 12%
depression in yield due to drought in 2008/09 for example, the Maize price could
increase to E113/ton. To put the rise in price in perspective it is estimated
that for every E5/ton rise in ex-farm cost of maize, US broiler integrators
would bear an additional cost of nearly E65 million on an annual production of
16 million m tons of ready to cook product. Egg producers would experience an
increase of E35 million annually on an output of 7.5 billion
dozen.
Agribusiness giant ADM has effectively morphed into an energy
company as the leading ethanol producer with a current output of 4.5 billion
liters or 25% of the US supply. The appointment of Patricia Woertz, an
oil-industry executive previously with Chevron to the position of CEO of ADM
defines the future direction of the Company. The aggressive approach to
diversion of maize by ADM and other producers is a cause for concern as
expressed by Warren Staley of Cargill, since costs of livestock production
worldwide will increase due to the unprecedented trend in biofuel production
from maize. The introduction of new technology to produce cellulosic ethanol is
too far in the future to represent any relief to the livestock
industry.
The
question of concern relates to the justification for the distortion of rational
economics by government subsidies to produce ethanol. This will inevitably
result in inflation in the cost of poultry meat and eggs to consumers with
little resolution of the underlying problem of replacing oil imports into the
US.
By: Simon
Shane
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