US ethanol sector faces grim prospects-USDA

WASHINGTON Feb 26 (Reuters) - Hard times have hit the once-robust U.S. ethanol sector amid the economic recession, with as much as 15 percent of production capacity likely standing idle, USDA chief economist Joseph Glauber said on Thursday.

It was a sobering assessment of the fledging industry that was once bursting with optimism and financial gains as the country issued mandates on using the renewable fuel to reduce dependence on crude oil.

"The U.S. ethanol industry remains under significant financial pressure as the result of current economic conditions ...," Glauber told the annual USDA Agricultural Outlook Forum in Arlington, Virginia.

He said slowing gasoline consumption and lower prices have reduced incentives for blending ethanol in recent months.

Crude oil futures have tumbled from a record high above $147 a barrel last summer to around $45 on Thursday as the surge in prices triggered the backlash of reduced consumption.

The Energy Information Administration, the U.S. government's top energy forecasting agency, earlier this month cut its estimate for world oil demand in 2009 by 400,000 barrels per day, citing the slower global economy.

The EIA predicted that world oil demand this year would fall by 1.17 million bpd from 2008 to 84.70 million. That would be down from peak demand of 85.9 million bpd in 2007.

The state of the ethanol industry has been underscored by the second largest producer VeraSun Energy Corp VSUNQ.OB filing for bankruptcy protection in October due to high corn prices and a lack of financing.

VeraSun has since reached an agreement to sell five production facilities to top U.S. refiner Valero Energy Corp (VLO.N) for $280 million.

Glauber said excess ethanol production capacity was weighing on ethanol producers' returns as more plant capacity becomes available.

He said the Renewable Fuels Association has put existing ethanol production capacity at 12.4 billion gallons, including current plants not operating, with another 2.1 billion under construction or expansion.

"Current indications suggest that 2.0 billion gallons or more of plant capacity has been idled," he said.

Glauber said that as much as 15 percent of ethanol production capacity will be idle during the 2009/10 marketing year, based on the estimate of corn used to produce ethanol.

However, he said, rising mandates for ethanol use are expected to support corn demand and prices in the 2009/10 marketing year that begins Sept. 1.

He said mandated ethanol use rises from 10.5 billion gallons in 2009 to 12 billion in 2010. On a crop-year basis, that translates into about 11.5 billion gallons of ethanol demand in 2009/10, he said, adding that that would mean a 14-percent hike in corn used to produce the biofuel.

At a projected 4.1 billion bushels, ethanol use will account for 33 percent of expected corn use in 2009/10, up from a forecast of 30 percent the current marketing year. (Reporting by K.T. Arasu; editing by Jim Marshall)