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Cheap Corn Deters Buyers in U.S. Sugar-for-Ethanol Plan

A corn field outside Sheffield, Illinois, on July 2, 2013. Photographer: Daniel Acker/Bloomberg
A corn field outside Sheffield, Illinois, on July 2, 2013. Photographer: Daniel Acker/Bloomberg

Aug. 29 (Bloomberg) -- A glut of corn is limiting biofuel producer interest in a government program to sell surplus sugar for ethanol, potentially decreasing its effectiveness in propping up sugar prices.

Green Plains Renewable Energy Inc., the fourth-largest U.S. ethanol producer, has decided not to participate in the first round of a program designed to ease a sugar glut through biofuels, citing concerns over its cost and regulations. Valero Energy Corp., the third-biggest producer, also will skip the program, spokesman Bill Day said in a statement.

The effort to decrease this year’s record surplus may help the government avoid forfeitures on raw-sugar loans that were at $81.53 million earlier this week. Many producers expecting a record corn crop don’t see sugar as a competitive product, reducing interest in a program meant to lower government payments, said Todd Becker, chief executive officer of Omaha, Nebraska-based Green Plains.

“You don’t just open a fermentation tank and put some sugar in there,” Becker said today in a telephone interview. “We’re not at $8 corn anymore. Sugar isn’t a game-changer for anyone in the industry.”

Corn Futures

Last year’s drought drove corn futures to a record $8.49 a bushel. Farmers responded by planting what’s expected to be a record crop of 13.76 million bushels this year to rebound from the drought. That’s pushed the price of the grain, the main ethanol feedstock in the U.S., traded in Chicago down 43 percent to yesterday’s close of $4.8075 a bushel.

Bids to the government were due yesterday for buyers and sellers of sugar under a new program in which the U.S. Department of Agriculture matches companies that want to rid themselves of surpluses with businesses interested in acquiring sweetener to process into biofuels.

The initiative is meant to prop up prices and dispose of supplies used as collateral for government loans from the Commodity Credit Corp., staving off expensive forfeitures of those loans required under government rules.

Record domestic sugar output in the current season and increasing imports, especially from Mexico, pushed U.S. prices to the lowest since 2008 earlier this year, below the loan-default level, or about 21 cents a pound.

Sugar Prices

Domestic sugar on ICE Futures U.S. in New York closed yesterday at 20.95 cents a pound, up 1.6 percent to the highest closing price since April 16. World prices closed at 16.44 cents a pound, down 0.1 percent. The U.S., which for decades has artificially raised market prices by limiting imports under international agreements, already is using export credits to reduce the surplus.

The so-called Feedstock Flexibility Program, created by Congress in a farm law passed in 2008, has never been activated until now. On Aug. 15, the Department of Agriculture solicited bids from companies interested in purchasing sugar to covert into biofuel.

Even with limited appeal, the initiative still may push prices up enough to avoid some forfeitures, meeting the government’s goal, said Tom Earley, an economist with Agralytica, a food and agriculture consulting firm in Alexandria, Virginia, in a telephone interview.

Mississippi, Georgia

“What the USDA is doing with the flexibility program is going to have a positive influence on prices within the next month,” he said. “The price that ethanol producers will have to pay for the sugar may make it a viable option,” given that sales prices may be well below market rates, he said.

For ethanol producers, the program will mean little, said Bob Dinneen, chief executive and president of the Renewable Fuels Association, an industry trade group based in Washington.

“I don’t anticipate many companies will take advantage of it,” said Dinneen, who said any participation will probably come from producers in states like Mississippi or Georgia, where corn is less plentiful and sugar is nearer. The USDA is “trying to save the taxpayer money because they don’t have much else they can do,” he said. “This isn’t about ethanol. The USDA is awash in sugar, and they’re trying to get rid of it.”

Environmental regulations are also a concern, as switching to sugar may trigger environmental reviews that would delay production, Becker said.

EPA Rules

Under Environmental Protection Agency rules, any ethanol facility that switches to a different feedstock for which it hasn’t already been approved requires an updated engineering review. Some facilities don’t need EPA approval of their new plan, just additional information, the agency said in an e-mail. The extra paperwork is another hassle that makes conversion less desirable, Becker said.

Green Plains would monitor future bidding to see whether sugar cheap enough to justify extra transportation costs becomes available. Running sugar through a corn-ethanol plant isn’t particularly difficult he said, since making the biofuel involves converting grain into a sugar anyway. A bigger problem is creating new supply chains for a product that in the end would add only marginally to the industry’s bottom line, he said.

“I dump 1,000 trucks every day” filled with corn, he said. “I’m not going to do anything that would mess with this.”

Ethanol is blended with gasoline as part of a 2007 U.S. energy law, known as the Renewable Fuels Standard, which calls for refiners to use 13.8 billion gallons of the fuel this year and 14.4 billion in 2014. Ethanol is typically sold in a combination known as E-10, with 10 percent of the mix made up of the biofuel and the rest gasoline.

Poet LLC, the nation’s biggest ethanol producer, didn’t respond to requests for comment and Archer-Daniels-Midland Co., the second-biggest producer, declined to comment on its plans.

To contact the reporter on this story: Alan Bjerga in Washington at abjerga@bloomberg.net

To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net

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