Ethanol appears almost certain to win the food-versus- fuel contest in the United States. But not just yet.
The Agriculture Department forecast that a tad more corn will be used to make ethanol than to feed livestock this year may be a false milestone: ethanol makers say they won’t use that much corn while producing a record amount of the biofuel, hewing to a more efficient conversion rate.
More important, the USDA’s projection that corn for ethanol will rise two per cent in the new year is contrary to widespread estimates that ethanol output will fall with the imminent removal of a $6-billion tax break, ending five years of explosive growth for the sector and providing brief relief to a strained global corn market.
The Food and Agricultural Policy Research Institute (FAPRI), a University of Missouri think-tank, projects a five per cent drop in ethanol output in the year beginning on Sept. 1.
With the loss of the 45-cent-a- gallon excise tax credit, FAPRI says output would fall, rebound after a year and then grow more slowly in the future. The ethanol market is highly sensitive to prices, and high oil prices have ethanol sales running far above the federal mandate for use of biofuels.
Even that relatively small amount of extra corn could benefit a market facing bare-bones inventories. Some 870 million bushels, a three-week supply, are expected in U.S. grain bins when the autumn harvest begins in 2012.
Traders routinely debate whether the USDA projections make sufficient allowance for factors such as the fate of the ethanol credit. The tax credit, which helps ethanol compete on price with gasoline, is scheduled to expire on Dec. 31.
Loss of the credit would narrow the profit window for ethanol and discourage production.