The writing appears to be on the wall for the US corn-based ethanol industry.

After recording a compound annual growth rate of more than 21% in the past decade, production of the so-called first-generation biofuel has peaked and is expected to fall in the coming years.

In a report titled 1st Generation Ethanol Under Pressure*, Credit Suisse Analyst Mary Curtis says the US industry faces a number of formidable challenges.

These include surging corn prices, government caps on ethanol usage, technological advances in biofuel, plentiful supplies of cheap natural gas and declining gasoline consumption.

All these factors added together point to “a decline in first generation ethanol production,” Curtis predicts.

The United States is, by far, the world’s largest producer of ethanol, followed by Brazil.

In 2011, the United States produced 13.9 billion gallons of ethanol – mainly derived from corn – accounting for 63% of global production.

Blending Requirements

High oil prices and government requirements to blend ethanol in the country’s gasoline supply fueled growth in the industry between 2000 and 2010.

But it now appears that first-generation ethanol has become a victim of its own success.

A major reason is soaring corn prices. The US ethanol industry is expected to gobble up 42% of America’s corn crop this year, compared with 6% in 2000, according to the latest figures from the US Department of Agriculture.

Given the sheer scale of US corn production, that means the country’s ethanol industry will consume 14% of the world corn crop.

 

Soaring Corn Prices

 

The industry’s enormous appetite for corn, along with last summer’s punishing drought across swathes of the US Midwest, has driven up global corn prices, angering domestic livestock producers who use corn to feed their animals and countries where corn is a major part of the diet.

Higher corn prices have also eroded profits of ethanol producers and ratcheted up pressure on Washington to suspend or reduce the Renewable Fuels Standard, which was extended in 2007 by former US President George W. Bush to help get the fledgling ethanol industry up and running.

The legislation currently requires ethanol to comprise 10% of the country’s fuel supply, or about 13.2 billion gallons this year.

But ethanol supply is running at an annualized rate of 13.55 billion gallons so far this year, Curtis points out. Unless 15% blends or more are permitted and more pumps are installed at fuel stations to handle the higher percentage of ethanol in the country’s gasoline, this oversupply trend is likely to continue.

Ethanol producers, of course, would like to see the 10% mandate increased to soak up this excess supply and, hopefully, push up prices.

But that seems highly unlikely in the current political environment. The auto and petroleum industries and consumers have all shown resistance to higher blends.

Dozens of lawmakers have petitioned the US Environmental Protection Agency (EPA), which is charged with implementing the legislation, calling for the ethanol mandate to be suspended or lowered for 2012 and 2013 to cut corn prices. The EPA must make its decision by November 13.

Second-Generation Ethanol Winning Support

Another major headache for corn-based ethanol producers is second-generation cellulosic ethanol, which is winning support because it doesn’t threaten food supplies.

While first-generation ethanol can be made from food crops such as corn and sugarcane, second-generation ethanol is produced from wood, stems, leaves and husks.

“We see increasing political pressures globally to reduce the use of food in ethanol production, and as such believe future growth in 2G (second-generation ethanol) could be at the expense of 1G (first- generation ethanol),” Curtis says.

But even second-generation ethanol is not a clear winner from the growing opposition to its corn-based cousin.

It is more difficult and costly to produce and policymakers may, in the end, choose “natural gas as a partial substitute for more expensive 2G fuels,” Curtis suggests.

“Natural gas is abundant in the US, has a slightly lower carbon footprint than gasoline, is sourced domestically (benefits national security) and does not compete with food resources,” Curtis writes.

Other problems for the ethanol industry – first and second-generation – are the loss of government subsidies at the end of 2011 and the declining demand for gasoline in the United States, as more fuel-efficient cars hit the country’s roads.

“The forecast decline in US gasoline consumption implies a decline in demand for ethanol, unless higher blends are adopted,” Curtis says.

For more on this story go to:

http://www.thefinancialist.com/ethanol-yesterdays-renewable-energy/

*For the Credit Suisse 1^st generation under pressure go to: