The extra corn consumption spurred by extending America's ethanol tax perks could US send supplies of the grain to their tightest ever, creating a "heightened price risk", Rabobank has warned.

Even without the renewal of the $0.45-a-gallon tax credit on blending the biofuel into forecourt fuel, the amount of corn in making ethanol in 2010-11 will beat the 4.8bn bushels that US officials forecast.

Ethanol output is running far ahead of year-ago levels, up 23% in the first 11 months of 2010, spurred by the fuel's lower price compared with gasoline. Ethanol futures, at less than $2.20 a gallon heading into 2011, compare with some $2.30 a gallon for gasoline.

The continuation of the blender's credit, which is due to expire at the end of this month, would only enhance the sector's prospects in early 2011, making the fuel viable at a price of $2.70 a gallon and a corn price of $7.00 a bushel,  both some 20% above current futures values.

A bill proposing the extension of the credit is on its way back to the US House of Representatives after on Wednesday clearing the US Senate, where a move to cut the perk to $0.36 a gallon was not given a vote.

'Heightened price risk'

The likely result of the passing of the legislation would be "ethanol production continuing above mandated levels, pushing corn demand for ethanol over 5bn bushels… and bringing increased pressure on an already precariously-balanced US corn balance sheet", Rabobank said.

Indeed, the extra ethanol consumption implied corn's stocks as compared with use - a key measure of the tightness of supplies and so the prices they can command, ending 2010-11 - at less than 4%.

"The potential for US corn to reach a record low stocks-to-use level signifies a heightened price risk for the corn market and a need for prices to start rationing demand, ethanol and other," the bank said.

Corn prices have already rocketed some 80% in Chicago from a late-June low, boosted by firm demand at a time of disappointing output in the US, the world's top producer, as well as by strong markets for alternatives, such as wheat, too.

Corn vs cane

Rabobank attributed the jump in ethanol output, beyond levels needed to meet government mandates, to uncertainty over the renewal of the tax credit, which a month ago had looked likely to be allowed to lapse, and to soaring export demand.

US shipments for the first 10 months of 2010 more than tripled to 7bn gallons, in part thanks to the squeeze on supplies cane ethanol produced in many other countries as mills have switched to high-priced sugar instead.

Unica, the Brazilian cane industry association, on Tuesday cut by 900m litres, to 25.5bn litres, its forecast for ethanol output from the country's key Centre South region, citing the increased returns to be made from producing sugar instead.