Follow us on twitter
Site Feed
Podcast
Email Updates
EU – U.S. Biofuel Issues
Before getting into today’s summary regarding biofuels, a recent publication regarding EU farm policy should be noted.
Tamsin Cooper, David Baldock, and Martin Farmer, of the Institute for European Environmental Policy (IEEP), have published a timely and comprehensive background paper regarding the EU Common Agricultural Policy “Health Check” (“Toward the CAP Health Check and the European Budget Review”), which provides a well-organized overview of the key issues associated with the “Health Check” process.
More specifically, the “paper discusses the prospects for agricultural policy reform in the European Union (EU) arising from the 2008 Health Check of the Common Agricultural Policy (CAP ) and the review of the European budget, due to be completed in 2009. Its aim is to locate the expected proposals of the Health Check in recent and potential future evolutions of the CAP; to review the proposals, situate them in a broader context of concurrent political processes and EU policy priorities; to discuss the extent to which they will frame the nature and trajectory of the debate; to consider the key players; and to discuss some of the issues that arise and desirable outcomes for 2013 and beyond.”
This valuable CAP reference guide can be downloaded by clicking here.
Biofuels
John W. Miller reported in today’s Wall Street Journal that, “The European Union’s dream of using vegetable-based diesel fuel in cars to cut oil imports and the pollution that causes global warming is turning sour.
“The bloc made a big bet on biodiesel fuels in 2003, agreeing that its governments would phase in tax breaks and rules to encourage their production and use.
“The bet seemed to make sense. Most Europeans drive diesel cars, making ethanol — the U.S. clean fuel of choice for gasoline-powered cars — impractical. Biodiesel can be mixed with regular diesel fuel and, when blended, doesn’t need any special pumps or engine-design changes.”
Mr. Miller went on to explain that, “As with ethanol in the U.S., though, Europe now has a glut of biodiesel. The world consumed only nine million tons of biodiesel last year. Europe’s producers found buyers for just five million tons. The industry is in trouble, under pressure from soaring costs, disappearing tax breaks, less-costly imports and waning public support.
“The trend is at odds with conventional wisdom that rising oil prices make green energy more attractive. It also means the EU risks missing the goal it set in 2003 of replacing 10% of transportation fuel with nonfossil fuels by 2020.”
The Journal article also noted that, “U.S. biodiesel producers enjoy a big tax credit from the federal government. This month, Congress voted to extend the tax credit until the end of 2010. EU producers recently asked the EU to impose punitive tariffs on biodiesel imports from the U.S., citing the subsidies as unfair competition. U.S. producers dispute the claim.”
And in conclusion, Mr. Miller reported that, “Peter Mandelson, the EU’s top trade negotiator, says the problem isn’t the use of biodiesel, but producing it in crowded, high-cost Europe. ‘Europe should be open to accepting that we will import a large part of our biofuel resources,’ Mr. Mandelson said in a speech this summer.
“U.S. ethanol producers are facing some similar problems. Buoyed by $7 billion a year in subsidies and a tariff on foreign imports, U.S. farmers planted a quarter more corn this year, most of it going toward making ethanol. But supply of ethanol is outstripping demand, mainly because of the difficulty and cost of transporting ethanol, which needs special pipelines. Some U.S. ethanol producers are idling production and a debate has begun over whether the pressure that ethanol production puts on agricultural land is worth the modest cuts in carbon-dioxide emissions it yields,” the article said.
An issue that is often addressed in news articles regarding biofuels, food costs, has also garnered recent attention in at least one EU country.
Dow Jones News writer Niels C. Sorrells reported today that, “Rising food costs aren’t a major contributor to overall cost-of-living increases, the German Agriculture Ministry said Thursday.
“According to a ministry statement, food costs have risen at a slower rate than general consumer costs. ‘Foodstuffs are not a cost inflator,’ said Agriculture Minister Horst Seehofer.
“According to the ministry, consumer prices rose an average of 2% a year between 1991 and 2006. During this period, food costs have only risen 0.9% annually. For the period December 2006 through November 2007, consumer prices in general rose 2%, while food costs rose less than 0.3%, the ministry said.”
U.S. Biofuel Issues
Associated Press writer Lauren Villagran reported yesterday that, “A bushel of soybeans for March delivery jumped 40.25 cents to $12.395 on the Chicago Board of Trade, after earlier hitting $12.455. Prices are just shy of 1973’s all-time high of $12.90 a bushel, which was hit amid a surge in exports to the expanding Russian market.”
The AP article stated that, “Stronger energy prices also supported the gains in soybeans, at times loosely linked to the energy market because of its use in biofuels. Soybean oil goes into a wide range of packaged foods and can also be used to make biodiesel, an alternative fuel more common in Europe and Asia. Higher oil prices can raise the appeal of biofuels.”
Also today, Dow Jones writer Tor Ching Li reported that, “Ethanol prices are now trading in line with gasoline prices for the first time since late August and, fueled by the new U.S. energy bill, are likely to rise further, Citigroup said in a recent report.
“‘We firmly believe the new energy bill will serve as a significant catalyst to the ethanol industry, as the higher mandated ethanol levels stipulated by the new renewable fuel standard should serve to bring ethanol supply and demand back into balance, thereby strengthening ethanol’s pricing fundamentals,’ said the report.”
The article indicated that, “Ethanol prices are currently at $2.31/gallon, up 20% over the past three months. Ethanol cash margins are up 5 cents at 42 cents/gallon, recovering 38 cents since bottoming at 4 cents/gallon in September.
“‘Cash corn prices remain strong, although high corn prices continue to be outweighed by improving ethanol prices,’ said Citigroup.”
Dow Jones writer Joe Poncer reported on Monday that, “The outlook for ethanol is guardedly optimistic for 2008, analysts say, and thus corn’s value next year will be influenced by the biofuel’s fortunes.
“After being the darling of the investing class a year ago, following a mandate to increase alternative fuels production, ethanol’s popularity has come under fire. Overproduction, charges that biofuel is an inferior product and limits on blending it in the gasoline supply — along with a host of other concerns — have lessened interest in ethanol.”
Mr. Poncer noted that, “Corn prices reached $4.31 a bushel this summer on the Chicago Board of Trade as the ethanol industry ratcheted up production to meet the mandate goals. Farmers responded in-kind with planting more than 90 million acres of corn, harvesting a 13.168 billion-bushel crop, the largest ever. That huge crop provided plenty of feedstock to an industry that nearly met the mandate goal within a year.
“All that extra ethanol supply weighed on both corn and biofuel prices as ethanol encountered a ‘blending wall’ in the fall, meaning companies that mixed the fuel additive with gasoline only incorporated the mandated amount of ethanol production, not the total supply. As a result, spot-month CBOT ethanol futures which traded as high as $2.38 per gallon in 2007, fell almost 90 cents per gallon by the fall, before staging a recovery to the current $2.10 per gallon level. The oversupply of ethanol caused profit margins to turn negative, analysts said.
“Just as ethanol prices rebounded, so have corn values as the grain tries to stay competitive with other crops in the race for spring acreage. In fact, March CBOT corn prices are roughly even with its spring high.”
With respect to the recently passed Energy Bill, the article stated that, “The bill boosts the amount of ethanol required to be blended into gasoline to 9.0 billion gallons in 2008, well above the prior level of 5.4 billion gallons and increases the blending requirement annually, topping out at 15 billion gallons by 2015.
“Despite the increase in blending requirements, analysts don’t expect corn futures to garner much additional support in 2008 as current and planned ethanol plant construction will top the new blending requirement.
“The increase in the blending requirement will provide underlying support for corn prices but even if just half of the planned production comes on line in 2008, there will be more than enough ethanol to reach the blending requirement, McCambridge [Shawn McCambridge, senior grain analyst at Prudential Financial] said.”
And Joshua Boak, writing in yesterday’s Chicago Tribune, reported that, “What is different about these days is the spectacular rise in corn prices because of the ethanol boom. Grain farmers’ net income in the state [Illinois] stayed above $110,000 for the second straight year in 2007 after settling below $30,000 in 2002, according to University of Illinois researchers.
“But there is no free lunch. And one result of the farmers’ good fortune is that consumers are paying more for food. Dairy, beef and bread prices are all connected in one way or another to the farm economy. Corn is animal feed as well as a source of biofuel, and with corn futures contracts above $4 a bushel — twice the 2005 price — a striking cause-and-effect phenomenon has come home to roost.
“Some in the food industry are concerned about the impact of ethanol on consumer prices but you won’t find much apologizing from most of the folks in farm country. Nor is there an abundance of gloating. They know too well that just as drought follows rain, commodity prices that go up will eventually go down.
“Corzine [Len Corzine] also said lower corn prices were once just as controversial as high prices. The use of cheap high-fructose corn syrup as a sweetener has gotten some of the blame for the obesity epidemic, he noted.
“‘See how that pendulum jumps back and forth,’ Corzine said.”
The Tribune article added that, “Americans are swallowing an increase of more than 4 percent in food prices this year, after increases of about 2.4 percent during the past two years, according to the U.S. Department of Agriculture. The Grocery Manufacturers Association, which represents food and beverage companies, pins the blame squarely on federal laws that promote ethanol as an alternative fuel.
“The 2005 Energy Policy Act ordered the mixture of 7.5 billion gallons of corn-based ethanol with motor fuel by 2012. And Washington upped the ante last week, when President Bush signed into law a new energy bill requiring 15 billion gallons of corn-based ethanol by 2015, with the majority of alternative fuels to come from other sources such as prairie grass, vegetable oil and garbage by 2022.
“The 2005 mandate halted years of low prices. Corn was $2 a bushel, meaning that 72,800 kernels of corn cost roughly the same as a cappuccino. It has since almost doubled, while soybeans and other commodities shot up in price as more farmland was switched to corn.
“‘The government has intervened in the market in a way that would make Stalin blush,’ said Scott Faber, vice president for federal affairs of the Grocery Manufacturers Association.
“The food-versus-fuel debate is familiar to Corzine. As a past president of the National Corn Growers Association, the fifth-generation farmer helped start it.”
And pointing to the energy bill’s impact, the Tribune article succinctly stated that, “Although prices usually jump when there is a shortage, they climbed this year during record yields. Farmers who harvested slightly more than 160 bushels per acre two years ago reaped more than 200 bushels per acre. That translated into 13.1 billion bushels of corn nationwide, the most since 1933. Farmers had a net income of $87.5 billion, about $30 billion above the recent average, the government said.”
***
An update posted on Friday at the National Association of Wheat Growers Online, stated in part that, “Congress left town this week after passing an omnibus spending measure that, when signed, will fund the government for fiscal year 2008. The omnibus included funding through March 15 for some expired or expiring programs authorized in the 2002 Farm Bill, which should break an impasse on trade promotion program funding.”
Klaus Marre, writing yesterday at The Hill Online, reported that, “President Bush on Wednesday signed the omnibus spending bill but criticized Congress for inserting nearly 9,800 earmarks into the funding measure.”
Keith Good
