CHICAGO (Dow Jones)--Thursday's supply and demand report might not be the last time the U.S. Department of Agriculture slices projected ethanol demand, but it was likely the last big cut, at least for a while, analysts said.
The USDA, in its monthly world supply and demand report, lowered its forecast for corn usage by the ethanol sector to 3.7 billion bushels, a 300-million-bushel drop from its November forecast. It said prospects for blending above federally mandated levels will decline.
The industry has been plagued by widespread financial problems and falling gasoline prices that have led to bankruptcy in some cases, such as VeraSun, the largest ethanol producer. The government noted that the industry's financial problems are reducing plant capacity utilization and delaying plant openings.
"With the ethanol, I think we'll probably lose another 100 million (bushels of corn) there as we go through the winter," said Arlan Suderman, analyst for Farm Futures.
Marty Foreman, senior economist for Doane Advisory Services, said that processing and blending margins have suffered lately, but that unless the situation deteriorates further, there should not be more large reductions in corn demand for ethanol.
"I think for now, 300 million bushels is a pretty big cut at it," Foreman said.
He said he expected any further cuts would be less severe.
The federal renewable fuels mandate gives an underpinning of support to the market, analysts said. The bottom line, said Jason Ward, analyst for Northstar Commodity, is that the mandate is for 10.5 billion gallons in 2009, and meeting the mandate will require corn at about the levels projected in the USDA report.
Although the industry's production capacity has dropped, he said, it is still above the mandate, Ward said. He added that producers make about 2.8 or even 2.9 gallons of ethanol per bushel of corn, which means they need about 3.75 billion bushels of corn to meet the mandate, he said.
"The lowest I could possibly see it going is 3.65 (billion bushels)," Ward said.
Refiners face penalties if they don't meet blending requirements, he added, and when capacity dipped below the mandate in 2006, the market reacted by pushing ethanol prices higher and boosting margins.
Shawn McCambridge, senior grains analyst for Prudential-Bache, said capacity could dip below the mandate because the economy will make politicians unwilling to enforce penalties or push for more ethanol at the expense of consumers.
He said the USDA's 300-million-bushel cut was surprising in that the government took the demand "from this report all at once." At the same time, he said he couldn't really argue against the cut.
"I think it reflects where we are today," McCambridge said.
Any further cuts would require continuing poor ethanol margins and a drop in crude oil prices, McCambridge said.
Ward said ethanol's demand will stay relatively stable only as long as the mandate does. He does not expect the U.S. government to reduce the mandate this year, but said some are expecting the new administration will take action.
"As a corn guy, I'm a little bit nervous about the mandate," Ward said.
-By Ian Berry, Dow Jones Newswires; 312-341-5778; ian.berry@dowjones.com