OECD-FOA Agricultural Outlook features ethanol forecast

By Erin Voegele | July 06, 2015

The Food and Agricultural Organization of the United Nations and Organization for Economic Co-operation and Development have published a new agricultural outlook predicting that ethanol and biodiesel use will continue to grow over the next decade, although at a slower pace. According to the report, titled “OECD-FAO Agricultural Outlook 2015-2024,” the level of biofuel production is expected to be dependent on policies in major producing countries.

The report also predicts that strong crop yields, higher productivity and slower growth in global demand should contribute to a gradual decline in real prices for agricultural products over the next decade. However, prices are likely to remain at levels above those experienced in the early 2000s. According to the report, lower oil prices are expected to contribute to lower food prices by pushing energy and fertilizer costs down. In addition, low oil prices are expected to remove some incentive from the production of first-generation biofuels.

Regarding ethanol, the report predicts that lower oil price assumptions over the next decade will mean biofuel production will be closely tied to policies mandating its use. In the U.S., growth in ethanol production is expected to arise primarily from cellulosic ethanol. However, in Brazil, blend mandates have recently been increased to 27 percent, along with the establishment of tax policy that favors the domestic hydrous ethanol industry. The outlook assumes domestic gasoline prices in Brazil will be kept above international prices during the early years of the projection period and that logistical issues with limit ethanol import possibilities in the short-term. As a result, the report predicts the Brazilian ethanol industry is set to produce two-thirds of the additional global ethanol supply over the next decade. The FOA and OECD predict global sugarcane production will increase 21 percent over the outlook period, with the share of global sugarcane production processed for ethanol set to expand from 20 percent in the 2012-’14 base period to 25 percent by 2024. Nearly 60 percent of additional sugarcane production will originate from Brazil.

The report indicates that among all commodities considered in the FOA/OECD outlook, ethanol is the most influenced by oil price variations. The report predicts the 2014 drop in crude oil prices is expected to put downward pressure on ethanol prices in the short term. Brazilian ethanol is assumed to be uncompetitive during the first five years of the projection period due to a domestic pricing policy that keeps gasoline prices in Brazil above international oil prices. Export recovery is expected to take place during the second half of the projection period when Brazilian ethanol and gasoline prices are expected to move in line with international ones. The report notes, however, that export expansion is expected to occur at a relatively moderate rate due to limited export opportunities related to the uncertainty of U.S. bioenergy policy and the 10 percent blend wall limit.

On a global basis, the outlook predicts total ethanol production will increase from the current 108.197 billion liters (28.58 billion gallons) to 134.436 billion liters in 2024, achieving a 1.57 percent growth from 2015 through 2024. In the U.S., ethanol production is expected to increase from the current 53,961 billion liters to 56,691 billion liters in 2024, with 1,273 billion liters of that increase from second-generation sources. Brazilian production is also expected to increase, from the current 26,566 billion liters to 42,482 billion liters in 2024. In Europe, ethanol production is forecast to increase from 6,896 billion liters to 9,491 billion liters, including 430 million liters of second-generation production.