Future of Biofuels Expected to Remain Bright

The New York Times
By ANDRÉS CALA
Published: May 18, 2009
SALAMANCA, SPAIN — Only a year ago, biofuels were blamed for soaring prices of vital food commodities like corn, wheat, sugar and vegetable oils. Riots in more than 30 countries and warnings from environmental groups, governments, the United Nations and the World Bank triggered a global debate over public support for the expanding biofuel industry.
Then, as credit dried up and the global recession took hold, the burgeoning industry imploded — which at least silenced the outcry. Commodity prices tumbled even faster than crude oil as global fuel demand evaporated. The bursting of the biofuel bubble left dozens of plants idle and forced some of the biggest names in the industry to file for bankruptcy.
Among the casualties, the biggest ethanol plant in Spain halted production in September 2007, barely a year after starting operations. Jointly owned by a unit of Abengoa, a Spanish company that is one of the top biofuel producers in the world, and Ebro Puleva, a food-processing company, the €150 million, or $200 million, distillery, with an annual capacity of 200 million liters, or 50 million gallons, stood idle for 11 months amid cereal fields in the flatlands near Salamanca, about 220 kilometers, or 140 miles, northwest of Madrid.
Production resumed only in August 2008, as cereal prices dropped from their record highs and the Spanish government mandated compulsory blending requirements for transport fuel — a law that took effect at the start of the year.
Despite last year’s setback, Javier Salgado, chairman of the plant’s operator, Abengoa Energia, is optimistic for the future.
“We have the fortune of working in a European regulated market,” Mr. Salgado said. “We are living a crisis; it’s hard; we are under cost control; but the horizon is one of growth. I can envision in 10 years that Europe’s ethanol market will multiply by five, by four in Brazil, and triple in the U.S.”
Abengoa, the biggest ethanol producer in Europe — and a recent entrant to the biodiesel business — has a global annual fuel production capacity of 1.9 billion liters, with another 1.15 billion liters under construction. It is currently building the biggest ethanol plant in continental Europe, in the Netherlands. The European Union has set a 2020 target of supplying 10 percent of its transportation needs with renewable sources, which includes biofuels.
Industry analysts and producer companies say they expect government policies to continue to underpin biofuels expansion. Despite that, commodity prices should stay low for much of this year, depressed by the economic crisis; but next year, if global energy demand recovers along with the economy, there could be a repeat of last year’s spike in global food prices.
Less than 5 percent of world cereal production will go to biofuels this season, according to the Food and Agriculture Organization of the United Nations. But that share is expected to rise steadily, at least until technology to process alternative raw materials is deployed on a global scale, a distant prospect.
Rising biofuel use, together with surging human and animal consumption, will continue to put pressure on global food supplies, mostly because cereal production is not keeping up with demand. “There is not enough money being devoted to agriculture. Long-term trends are pretty dire,” said Francisco Blanch, head commodity analyst for Bank of America-Merrill Lynch, in London. “We are setting ourselves up for another big rally.
“Prices are set by marginal changes in supply; biofuels are still biting into overall agricultural production, and there is a risk of another price spike in as little as a year. All we need is a bad crop.”
The ratio of world grain stocks to consumption — a measure of spare food capacity — is likely to remain historically low through 2010 and beyond, at around half its level at the start of the century, according to data from the U.S. Department of Agriculture and the United Nations.