Johannesburg - As oil prices recover, the competition for crops for food and fuel will intensify, Bank of America
Securities-Merrill Lynch said in the latest Global Energy Weekly report.
"A second round of food and fuel competition could happen as soon as next year," claimed the report, titled 'Biofuels ready to make a comeback'.
"Should oil prices start to recover by 2010, we could see a repeat of 2007 and 2008, when small non-scalable dry milling projects mushroomed in farmers' backyards. As investment in large-scale second-generation biofuels plants fades, a pick-up in global oil demand next year could again drag millions of tons of corn, sugar and wheat out of the food pool into the fuel pool," reads the report.
The debate over crop use for food versus fuel has been central to government thinking on the adoption of biofuels.
While there has been a call for the world to reduce biofuel dependency on traditional crops, increased biofuel production capacity in the immediate term means that such a reduction in dependency on traditional crops "is unlikely in the next three years".
The report pointed out that the volatile oil price environment has proved challenging for biofuels.
Price volatility
Agriculture and energy prices saw extraordinary volatility during the past 12 months, whipping around biofuel margins sometimes into negative and sometimes into positive territory.
This volatility, coupled with the sharp decline in energy prices and a more modest decline in grains prices, forced both sugar and rapeseed-based biofuels into the red, with only US corn-based ethanol margins having stayed marginally positive, partly thanks to government subsidies.
"At current crop prices, we now estimate that most biofuel refineries around the world will need WTI crude oil prices above US$60/bbl to break even without government help," the analysis said.
In the meantime, limited access to credit and lower margins are impacting production.
On top of volatile and largely negative biofuels margins, biofuel refiners have also faced the economy-wide reduction in credit availability.
"The result has been a string of bankruptcies and investments cutbacks, driving down utilisation rates at biofuel refineries to very low levels," noted the report.
It cited Verasun in the US, which has filed for bankruptcy and is now shutting down 12 out of their 16 ethanol plants.
Northeast Biofuels and Renew Energy have also filed for bankruptcy, and Pacific Ethanol is now only operating one out of four of their plants.
Meanwhile, in Germany, reversions in tax breaks for biodiesel have thrown the sector into turmoil and as a result, German biodiesel output is expected to fall by about 13% this year.
In Brazil, UNICA has reduced its estimate of new ethanol mill additions in 2009 from 35 to 15.
As a consequence of these capacity utilisation and investment cutbacks, biofuels production is expected to increase at a much softer pace over the next 12 months, said Bank of America Securities-Merrill Lynch.
Looking ahead, the report said biofuel margins are expected to stay weak but prices are seen as firming.
Transport fuels
"Biofuels are now an integral part of global transport fuel output, but the lower margins are not helping to boost supplies. With agricultural commodities looking poised to firm up in the next few months, biofuels margins will likely remain under pressure for some time," the report reads.
"Surely, continued weakness in global oil prices suggests that consumers will opt for hydrocarbon fuels over biofuels, but still mandated targets will continue to push up biofuel demand," it added.
Thus ethanol prices could increase, particularly in the US where inventories are low and bankruptcies are expected to keep a lid on use rates in the coming months.
What is important is that governments around the world still support biofuels as a way to reduce oil dependency.
"Thus, while margins look poised to remain weak and the credit crunch is likely to limit investment into the sector, biofuels demand will continue to increase all over the world," the analysts pointed out.
In the US, the Obama administration is allocating US$800m to
research and development of next generation biofuels through the American Recovery and Reinvestment Act, while governments in other parts of the world have been urged to move away from conventional biofuels and towards more efficient second-and third-generation renewable fuels.
- I-Net Bridge