World Grain - April 2009 - 50

BIOFUELS QUARTERLY: ETHANOL'S OUTLOOK SOUND IN LONG TERM

play a much bigger role in deciding relative cost position than do differences in
plant operating efficiencies.
When the industry is running at 80%
or less, as it is currently, then even
those fortunate enough to operate will
not be far from breakeven on a cash basis. This is because the marginal plant
will look an awful lot like the rest of
the fleet - all the high-cost plants are
already idle. But if the industry can
run at 90% or 95%, that will imply that
some of the higher cost plants are running again. Under these circumstances
the lower cost facilities will be able to
earn a reasonable contribution margin
of 30¢ to 40¢ per gallon - pretty attractive for capacity that costs $1.50 to $2
to build.
NEAR-TERM OUTLOOK
The next two years will be tough for
the industry because there will not be
enough corn available to the fleet to operate at anything approaching capacity
(see figure 3, page 52).
In 2008, U.S. farmers produced 12.1
billion bushels of corn. It is likely that
the U.S. ethanol fleet will get between
2.8 and 3.3 billion bushels of corn and
produce between 7.1 and 9.1 billion gallons of ethanol in 2009.
Based on an estimated average 2009
capacity of 13.25 million gallons (including idled facilities), this implies
fleet-wide capacity utilization of between 55% and 70%, which will result
in breakeven economics at best across
the industry. The RFS will be satisfied
through a combination of 2009 production, carryover of 2007 and 2008 Renewable Identification Numbers (RINs)
and imports (import RINs can be used
to meet the RFS in 2009, but at this time
the RFS2 rules have not been published
for 2010 and beyond).
2010 could potentially be worse. Early indications are that U.S. farmers will
plant between 82 and 86 million acres -
substantially less than the approximately
93 million acres that would be required
to meet forecast food, feed and export
demand and provide the ethanol fleet

with the 4.5 billion bushels needed to
produce the 12 billion gallons mandated
in the RFS.
Based on 82 million acres planted,
average weather during the growing
season, and making reasonable assumptions about feed and export demand,
the ethanol fleet could get as little as
2.3 billion bushels of corn in 2010,

enabling production of only about 6.5
billion gallons, or less than 50% fleetwide utilization.
LONG-TERM OUTLOOK
By 2011, however, the situation will
turn around dramatically. The inescapable implication of the RFS is that there
will be enough corn to produce enough

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World Grain - April 2009

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