Ethanol fever push­ing prices

Maize pro­duc­ers and com­pa­nies stand to ben­e­fit

Finweek English Edition - - Agri-businesses - COPY: Jo­hann van Zyl AD­VER­TIS­ING: Joey van Dyk

THERE ARE AL­READY at least 110 ethanol plants in the United States pro­cess­ing a to­tal of 60m t/year of maize. That’s about eight times South Africa’s av­er­age an­nual maize pro­duc­tion. And in Ger­many it was stip­u­lated last year that re­finer­ies have un­til 2009 to mix at least 4,4% of bio-diesel with their con­ven­tional diesel and 2% of bio-ethanol with their petrol.

This al­most fever­ish switch to al­ter­na­tive fu­els is also tak­ing place in other coun­tries and is one of the main rea­sons for the world­wide in­crease in the price of maize.

In SA, a draft plan for a bio-fu­els strat­egy was re­cently ap­proved, which could pro­vide mo­men­tum to the in­dus­try’s de­vel­op­ment in SA. “The pro­posed oblig­a­tory mix­ing of bio-fuel is the most im­por­tant stip­u­la­tion in the draft strat­egy,” says Fanie Brink, MD of private com­pany Bio­fuel In­dus­try De­vel­op­ment. “It ben­e­fits all grain and oilseed pro­duc­ers – as well as novice farm­ers – and also en­ables SA to re­duce its de­pen­dence on im­ported crude oil.”

Brink reck­ons that the oblig­a­tory mix­ing of 8% ethanol and 2% bio-diesel in the ap­prox­i­mately 11bn litres of petrol and 8bn litres of diesel will use up 2m t of grain and 1m t of oilseeds. (Gov­ern­ment’s pro­vi­sional es­ti­mate is that this could save SA around R10bn/year im­port­ing crude oil.)

Absa agri­cul­tural an­a­lyst Ju­lia Kupka says that SA’s de­vel­op­ment of this in­dus­try will in­crease de­mand for agri­cul­tural com­modi­ties and help to en­sure a stead­ier agri­cul­tural in­dus­try. That could par­tic­u­larly ben­e­fit SA’s rural econ­omy.

First Na­tional Bank agri­cul­tural di­vi­sion head Ernst Janovsky says that SA farm­ers have an ap­prox­i­mately 60% price ex­po­sure to the in­ter­na­tional mar­ket and can do lit­tle about the huge price fluc­tu­a­tions. “Be­ing in­volved in the pro­duc­tion of al­ter­na­tive sources of en­ergy – such as bio-fu­els – could sta­bilise agri­cul­tural pro­duc­tion.”

An­dries Theron, a mem­ber of Grain SA’s se­nior man­age­ment, said at a re­cent farm­ers’ meet­ing in the West­ern Cape that ethanol could in­deed be man­u­fac­tured eco­nom­i­cally in SA but many more im­pact stud­ies would have to be con­ducted first. Gov­ern­ment must also be­come in­volved, as in the US, by of­fer­ing fi­nan­cial in­cen­tives and other as­sis­tance.

Theron says that fuel man­u­fac­tur­ing has al­ready pushed up the prices of maize and other types of grain in the US and that the same will def­i­nitely hap­pen in SA as soon as the pro­duc­tion of bio-diesel be­gins.

There­fore, it does seem that maize and other farm­ers – and, nat­u­rally, agri-busi­nesses in­volved in this in­dus­try – will ben­e­fit, thanks to higher prod­uct prices. How­ever, it could prove dis­ad­van­ta­geous to oth­ers, such as the poul­try and live­stock in­dus­tries, which de­pend largely on grain for feed­ing their an­i­mals.

It could mean higher meat prices and could even push up the prices of other prod­ucts, in­clud­ing soft drinks, be­cause corn syrup, which is used as a sweet­ener in soft drinks and other prod­ucts and is re­spon­si­ble for about 10% of the costs of man­u­fac­tur­ers like Coke and Pepsi, will be­come con­sid­er­ably more ex­pen­sive.

In the US, Heinz cau­tioned its share­hold­ers that the cost of the sweet­en­ers used in its tomato sauce would in­crease by about US$10m this year due to the far higher maize price.

So ethanol pro­duc­tion should be seen from dif­fer­ent an­gles. For some it would of­fer greater profit op­por­tu­ni­ties, but oth­ers will suf­fer.

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