Cellulosic Ethanol To Become New King In U.S.

Implications: With corn prices climbing to record new highs everyday, there is additional incentive to accelerate the drive to switch from corn to cellulose as the raw material for ethanol in the U.S. The Department of Energy, Congress and private enterprize have their foot on the accelerator to find a commercially viable cellulosic ethanol production technology.

Analysis: With corn prices climbing to record new highs nearly everyday, and a projected 33% of next year's U.S. corn crop going to produce ethanol, it is clear that this is not sustainable, even if marginally profitable with $125/barrel oil.

Over the past 18 months the U.S. government has committed over $1 billion to promote the production of cellulosic ethanol. Tied to this there appears to be a reduction in support to ethanol in the new Farm Bill, reducing the incentive to blend ethanol from 51 cents/gallon to 45 cents a gallon. This will not be enough to stop the construction of plants that are already past the financing stage, but tied to the run away corn prices and shift in political and consumer sentiment, it is forcing the cancelation of many proposed projects. ADM has the two largest plants that are still to be built, and they say they are still going ahead, with the financial resources in their CAPEX. I expect that corn to ethanol capacity in the current round of construction will peak below the 14 billion gallon/year capacity at the beginning of 2010. New commercial cellulosic ethanol plant construction will not begin on a large scale for at least another 3-4 years, as the process has to be proven and both capital and production costs have to be reduced  before financing can be obtained for these projects without government matching funds.

Keep an eye on Brazil's as they will be exporting larger quantities of  ethanol to the U.S., EU  and Japan this year. Though the Brazilian producers and exporters would like to see the import restrictions/tariffs removed around the world, they have growing incentives to export as domestic Brazilian gasoline prices remain low and a bumper sugar crop has dropped global sugar prices and  are allowing for low ethanol production costs in Brazil.