Oil’s Plunge Is an Existential Threat to a Far Cleaner Biofuel

Source: By Fabiana Batista and Tatiana Freitas, Bloomberg • Posted: Tuesday, March 17, 2020

Cheap gasoline may kill margins for corn-ethanol production in Brazil, a key global supplier of the alternative, cleaner-burning fuel

A worker collects corn grain on a truck at a farm in Rosario, Bahia state, Brazil, on Wednesday, May 9, 2018. 
A worker collects corn grain on a truck at a farm in Rosario, Bahia state, Brazil, on Wednesday, May 9, 2018. Photographer: Dado Galdieri/Bloomberg

The spectacular plunge in the crude market is sparking unprecedented reverberations across commodities and economies, with Brazil’s corn-ethanol producers standing out as a concentration of the pain.

It goes to show how the unraveling in the oil market is threatening production of cleaner, renewable energy. As gasoline tumbles, ethanol is under pressure. The two compete directly at the pump in Brazil, where most drivers have flex-fuel cars, which can run on either.

Corn-ethanol margins suffer on higher grain costs, oil collapse

Margins for the grain-based biofuel have already turned negative in Goias state, where a third of the nation’s plants are based, said Matheus Costa, an analyst at INTL FCStone. If lower energy prices are sustained, things could get worse. As many as 60% of planned expansion projects could be scrapped, according to Guilherme Nolasco, president of the industry group known as Unem.

It’s a sharp turnaround in outlook. Money had been flooding into the sector as companies like Cargill Inc. worked to increase capacity amid roaring demand for renewable fuel. Earlier in 2020, FCStone predicted corn-ethanol output in the upcoming 2020-2021 season would jump to 2.5 billion liters. That would’ve been up more than 16-fold from about 150 million liters just five years ago.

The collapse in oil comes at a time when corn costs had already been surging for the mills that turn the grain into biofuel. But relatively high energy prices allowed the processors to stay profitable, with output expected to jump more than 50% this year from last season. That’s now been thrown into question.

“The corn-price boom combined with the oil plunge really concerns us that a hold is coming for investments,” Nolasco said at an industry conference last week in Sao Paulo.

Brazil has about 15 ethanol corn mills in operation, three in pre-operational stages, and 23 new plants are in the pipeline, according to Unem. If oil prices stay near current levels, it’s likely only 40% of the projects will continue, Nolasco said.

Unlike Brazilian plants that make ethanol out of sugar cane, which accounts for the vast majority of the nation’s 31-billion liter biofuel market, corn-ethanol mills have to buy the raw material from farmers.

The corn millers started expanding production when domestic prices for the grain were about 12 reais per 60-kilogram bag (132 pounds). Growth for livestock production increased demand for the grain along with biofuel and strong exports, pushing crushing costs for processors to about 26 reais in recent months.

Even with the expected drop in biofuel, corn is likely to stay in high demand because of protein production. That could send corn costs for millers to about 35 reais in the near term, further squeezing ethanol plants, Nolasco said.

Biofuel maker Sao Martinho is one of the companies poised to increase corn-ethanol output. It was recently downgraded by Bradesco BBI, party on the assumption that a planned biofuel expansion project in Goias won’t be approved by the board.

While Sao Martinho may end up moving forward with the project in the long term, “the final decision may be postponed by one or two months — until this turbulence calms down,” said Chief Financial Officer Felipe Vicchiato.

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