10/01/2012 (Financial Times) - The growth of the biofuel industry has come to an abrupt halt with annual output last year falling for the first time in a decade owing to poor margins in Brazil and the US, the world’s biggest suppliers.

Global biofuel production dropped to 1.819m barrels a day, from 1.822m b/d in 2010. The drop ends a decade of steady growth in biofuel production, according to data from the International Energy Agency.

The rapid expansion of the biofuel industry over the past 10 years has been controversial because it transforms food crops such as corn, sugar, palm oil and wheat into fuels.

Opponents have accused the industry of contributing to higher agricultural commodities prices, a claim strongly denied by biofuel companies.

The slowdown coincides with Washington ending a 30-year fiscal support to the industry. On the first day of 2012 it removed a tax credit costing about $6bn and a tariff that helped to encourage the development of the domestic biofuel industry.

Analysts and executives said that the slowdown would have important ramifications for the energy and food commodities markets and industries.

Global biofuel output is equal in size to the oil production of some of the members of the Opec cartel, making it a key cog of the world’s energy supply, helping to shape crude oil prices. “The less biofuel you have the more gasoline you need,” Amrita Sen, oil analyst at Barclays Capital in London, said.

The slower growth could relieve pressures on food prices, particularly in the US, where the ethanol industry consumes about 40 per cent of the country’s crop of corn, and in Brazil, where it consumes sugarcane.

Although the drop in production is likely to be reversed this year, industry executives and analysts expect supply growth will be significantly slower over the next five years than in the past. While output grew by 1m b/d between 2006 and 2010, the IEA forecast an increase of just 0.4m b/d between 2011 and 2015.

The slowdown comes as US and Brazilian biofuel companies suffer from poor margins owing to costlier corn and sugarcane as well as under-investment. China, which was developing large domestic industry, has scaled back its original ambitions because of concerns over higher food prices.

Oil refiners, which are under pressure from thin margins, could benefit from lower biofuel output and more demand for petrol and diesel, while biofuel groups such as privately owned Poet, of the US, and Cosan, of Brazil, could suffer.

The impact on US companies would be exacerbated by the end of a tax credit on ethanol of 45 cents a gallon and a tariff of 54 cents a gallon that protected them against cheaper Brazilian ethanol, analysts said.