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World ethanol prices increased strongly in 2011 well above the levels of the 2007/08 highs in a context of strong energy prices, although the commodity prices of ethanol feedstock, mainly sugar and maize, decreased from their peaks in 2010. The two major factors behind this increase were the stagnating ethanol supply in the United States and a drop in Brazilian sugar cane production. Additionally, ethanol production was also significantly below expectations in developing countries having implemented mandates or ambitious targets for the use of biofuels.
World biodiesel prices also increased in 2011. Contrary to the global ethanol market, production did not stagnate in 2011; the four major biodiesel producing regions (the European Union, the United States, Argentina, and Brazil) increased their supply compared to 2010. This increase was moderated by a decreasing biodiesel production in Malaysia (from about 1 Bnl in 2010 to almost nothing in 2011).
- Over the projection period, ethanol and biodiesel prices are expected to remain supported by high crude oil prices and by the implementation and continuation of policies promoting biofuel use. Changes in the implementation of biofuel policies can strongly affect biofuel markets.
- Global ethanol and biodiesel production are projected to expand but at a slower pace than in the past. Ethanol markets are dominated by the United States, Brazil and to a smaller extent the European Union. Biodiesel markets will likely remain dominated by the European Union and followed by the United States, Argentina and Brazil.
- Biofuel trade is anticipated to grow significantly, driven by differential policies among major producing and consuming countries. The United States, Brazil and the European Union policies all “score” fuels differently for meeting their respective policies. This differentiation is likely to lead to additional renewable fuel trade as product is moved to its highest value market, resulting in potential cross trade of ethanol and biodiesel.
Focus: Biofuel mandates in the United States to encourage trade?
There are many uncertainties concerning the future of biofuel policies. An important one concerns the policy options faced by the US Environmental Protection Agency (EPA) in the implementation of the US biofuel policy.
The Outlook report provides a scenario analysis of three alternative policy implementation options that take into account the fact that the cellulosic mandate as defined in the Energy Independence and Security Act of 2007 (EISA) will not be met. Those scenarios have been produced to illustrate the policy space, and not to promote any particular policy option. The results of the scenario can be summarised as follows:
- If the shortfall in the cellulosic mandate in the global US mandate is met by raising the mandate for advanced biofuels or by allowing more corn-based ethanol, the impacts on world prices for biofuels (in particular ethanol) as well as for biofuel feedstocks (coarse grains, sugar cane) are likely to be important. Spill-over effects on other agricultural commodity prices (including meat and fish) would occur.
- Meeting the adjusted US biofuel mandate will require some adjustment in terms of ethanol production and consumption patterns, as well as in terms of ethanol feedstock use around the world. Food is likely to cost more as a result of such adjustments.
- An important policy driven two-way ethanol trade is likely to emerge between Brazil and the United States under certain conditions. Brazil is likely to be the sole country able to adapt and respond to US demand. This is due to the nature of its ethanol production based on sugar cane, its flexibility to switch between ethanol and sugar production, and to the rising demand for ethanol used for flex-fuel vehicles in Brazil.