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Short sugar supplies add to ethanol demand

DANIEL LOOKER 02/09/2011 @ 1:03pm Business Editor

Tight world supplies of sugar are contributing to the demand for corn in Wednesday’s USDA in two ways, by increasing exports of U.S. ethanol into markets usually served by Brazil, and by increasing the demand for high fructose corn syrup, analysts told Agriculture.com Wednesday.

“The export market needs ethanol because Brazil isn’t producing anything because sugar is too profitable,” says Jerry Gidel, of North America Risk Management Services in Chicago.

Chad Hart, an agricultural economist at Iowa State University who tracks markets agrees.

“We’re exporting more ethanol than we ever have,” he says.

In the February World Agricultural Supply and Demand Estimate report USDA increased its projected use of corn for ethanol from the January estimate by another 50 million bushels, to 4.95 billion bushels.

And it increased its projection of food use by 20 million bushels, with 15 million of that due to higher exports of high fructose corn syrup to Mexico, where it’s replacing sugar in soft drinks.

The Renewable Fuels Association said Wednesday that projected ethanol production may be too high.

“USDA may be slightly overestimating corn for ethanol use,” RFA said in a statement. “Based on their estimates, ethanol production between Sept. 1, 2010 and August 31, 2011 would be nearly 13.7 billion  gallons.  The RFA is projecting 13.5 billion gallons of production for calendar year 2011, which would be nearly 1 billion gallons more than the Renewable Fuel Standard requirement of 12.6 billion gallons this year.  Even with 300-400 million gallons of export opportunity, it seems unlikely the U.S. market could handle all the remaining 13.3-13.4 billion gallons. USDA may also be underestimating ethanol yield per bushel.”

Both Hart and Gidel think that the USDA projection is accurate, for now at least. Although ethanol plant margins have recently fallen to break even or even slight losses, based on futures prices of ethanol and corn, the industry has purchased cheaper corn on contract and remains profitable.

But Hart expects tougher times if prices continue to rise.

“This is a market in search of a price point that will ration this crop out,” he says. “And we haven’t found it yet.”

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