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Cheap corn deters buyers in U.S. sugar-for-ethanol program

By Alan Bjerga and Marvin G. Perez

Bloomberg News

WASHINGTON — A glut of corn has damped interest by biofuel makers in a U.S. government program to sell surplus sugar for ethanol, potentially decreasing its effectiveness in propping up sugar prices.

With the U.S. harvest of corn, the nation's biggest crop and the source of most of its ethanol, expected to set a record this year, ethanol producers don't see sugar as a competitive substitute, said Todd Becker, chief executive officer of the Omaha, Neb.-based Green Plains Renewable Energy Inc., the fourth-largest maker of ethanol in the United States, which decided not to participate.

The price of corn has plunged 43 percent since reaching a record $8.49 a bushel during last year's U.S. drought. The government said this month that farmers will boost production by 28 percent to an all-time high of 13.763 billion bushels. The grain closed Wednesday at $4.8075 a bushel in Chicago trading.

"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."

Bids to the government were due Wednesday for buyers and sellers of sugar under the program in which the U.S. Department of Agriculture will match companies that want to rid themselves of surplus sugar with businesses interested in acquiring the sweetener to process into biofuels.

The initiative is meant to prop up sugar prices — depressed by a record surplus — 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. The value of outstanding loans using raw sugar as collateral stood at $81.53 million earlier this week.

The Feedstock Flexibility Program, created by Congress in 2008, has never before been activated. On Aug. 15, the USDA solicited bids from companies interested in purchasing sugar to covert into biofuel.

Meanwhile, record domestic sugar output in the current season and increased 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.

Domestic sugar on ICE Futures U.S. in New York closed Wednesday 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, 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.

Valero Energy Corp., the third-biggest ethanol producer, also declined to participate in the USDA program, spokesman Bill Day said in a statement. Poet, the nation's biggest ethanol producer, didn't respond to requests for comment on whether it will participate. Archer-Daniels-Midland Co., the second-biggest producer, declined through a spokesman to reveal its plans.

Even with limited participation by buyers, the sugar-for- ethanol initiative still may push prices up enough to avoid some forfeitures, meeting the government's goal, Tom Earley, an economist with Agralytica, a food and agriculture consulting firm in Alexandria, Va., said in a telephone interview.

"What the USDA is doing with the flexibility program is going to have a positive influence on prices within the next month," Earley said, noting that sale prices may be below market. "The price that ethanol producers will have to pay for the sugar may make it a viable option."

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 predicted 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."

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.