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Corn+Soybean Digest

Drought Mutes E15 Impact | Long-Awaited Ethanol Market Expansion Hope Dries


Just as E15 finally cleared federal regulatory hurdles, the confluence of no blender tax credits, high corn prices and widespread drought has put the ethanol market in jeopardy. And questions abound regarding possible government changes to the current Renewable Fuel Standard.

"In light of the economics of the ethanol industry, E15 is at least on hold for now," says Richard Brock, Brock Associates, Milwaukee, Wis. Ethanol industry proponents were optimistic about the outlook for E15 before the drought developed, but any expansion in ethanol production and demand may now be delayed.

“By mid-summer, many plants are showing losses, resulting in several temporarily shutting down. On a positive note, as inventories are drawn down, ethanol prices will start to regain their prices relationships to gas and return some to profitability,”Brock says. “Demand destruction is much harder to recover from than supply destruction." Ethanol plants were losing money even before the drought, he says.

“Ethanol prices fell in late 2011 from the elimination of the 45¢/gal. blender tax credit, according to a May 2012 report from the University of Missouri's Food and Agricultural Policy Research Institute (FAPRI). The 54¢/gal. specific duty on ethanol imports and the $1/gal. biodiesel blender tax credit also expired at the end of 2011.

The Brock Report adds:

“The reduction in production and ethanol stocks prompted a 15¢/gal. boost in ethanol price, from $2.56 the week ending July 13 to $2.71 the week ending July 20 “Iowa State University (ISU)’s estimates indicate $2.62 is needed to cover production costs. The price of DDGs have also been climbing, carrying ethanol producer margins back toward black ink. USDA’s Ag Marketing Service data show Iowa DDGs prices at 101% of corn prices on a per-pound basis vs. 80% of corn a year earlier.

‘Compared with a year ago, the increase in DDGs prices has added 70-75¢/bu. to the value of corn,’ says Bob Wisner, ISU professor emeritus. “Iowa cash corn prices went up by $1.07/bu. during the same period. ‘I am hearing that part of the reason for DDGs prices moving up more than corn is because of tight and expensive soybean meal supplies, because (DDGs) are less expensive than soymeal.”

Ethanol plants “ramped up production prior to the expiration, and the price of ethanol plummeted with the increase in inventory," Brock says. "Only now are supplies coming down enough to increase ethanol prices and allow plants to pay a little more for corn. But the availability of 2012 corn for ethanol use has probably dropped from 5 billion bushels to 4.6 billion or less."
Ethanol production is slowing “as the combination of lower gasoline prices and higher corn prices squeeze margins for both producers and blenders of ethanol," says Darrel Good, University of Illinois ag economist. "USDA's current projected corn use for ethanol production at 5.05 billion bushels is about 0.6 % more than used last year."
Through the first 10 months of the 2011-2012 marketing year, ethanol production was up about 2%. The Renewable Fuel Standard (RFS2) requires a 600-million-gallon (4.5%) increase in renewable biofuel blending in 2013.  However, Good suggests that if margins remain under pressure, part of that requirement could be met with credits associated with excess production in 2011 and 2012 rather than with actual ethanol production. If that occurs, Good agrees corn consumption by ethanol production would fall short of USDA's projection.

And President Obama could close ethanol plants to keep corn available to help feed people, Brock says. "He could invoke executive privilege. It is an election year.”


NCGA opposes altering RFS

NCGA disagrees with a potential Renewable Fuel Standard Flexibility Act of 2012. The bill would soothe corn prices when stocks are tight, requiring EPA to drop corn ethanol production quotas by up to 50%, depending on the ratio of corn stocks to use. As this was written, it had not yet been taken up by the House Energy and Commerce subcommittee.

Under USDA’s July estimates, the 2012/13 crop stocks-to-usage ratio is 9.3%, which would mean a 10% reduction in the national quantity of fuel required, says Richard Brock, Brock Associates.

The NCGA “stands firm in its support of the Renewable Fuel Standard (RFS) and will strongly oppose legislation to alter or repeal the RFS,” says NCGA President Garry Niemeyer. “Likewise, we believe it is premature for an RFS waiver at this time. We believe the flexibility of the RFS does work and will work.

“In addition, the ethanol industry now has a significant surplus of ethanol and RFS credits that can greatly offset ethanol’s impact on the corn supply.”


Where we stood before the drought

Ethanol produced to date in the U.S. has been primarily E10 (10% ethanol blended with gasoline) and blends up to E85 (85% ethanol used in flex-fuel vehicles). Bob Dinneen, Renewable Fuels Association (RFA) president and CEO, says 14 billion gallons of ethanol – representing the E10 blend wall – are used domestically in about a 130-billion-gal. annual gasoline market. One bushel of corn yields 2.8 gal. of ethanol.

The 2007 U.S. energy bill mandated that 15 billion gallons of ethanol be produced by 2015 to help improve energy independence. RFS2 increased the required volume of renewable fuel to be blended into transportation fuel to 36 billion gallons by 2022. A nationwide E15 market could represent nearly 20 billion gallons of annual ethanol demand from 7 billion bushels of corn.
E15 is approved for use in model-year 2001 and newer vehicles; about 62% of the light-duty vehicles on the road today, representing more than 80% of the unleaded fuel sold.

"In the longer run, mandates, rather than the market, will drive ethanol use for the most part," says Wyatt Thompson, FAPRI assistant professor. "E15 expansion pushes back the blend wall a little, but additional large increases in ethanol use must come from higher blends, such as E85."


E15 Fuel Marketer Challenges

Industry supporters had expected to see E15 as early as mid-September at some pumps, following the removal of federal regulatory barriers to commercialization. However, availability will be on a state-by-state – or even local – basis.

The RFA reports a number of gas marketers are already authorized to sell E15, as long as they follow approved misfueling mitigation plans (MMP). Fuel marketers must have a plan in place to prevent drivers from mistakenly putting E15 in pre-2001 vehicles, including mandatory labels on E15 pumps and routine testing to confirm pump contents match the label.

Opponents argued that where a single hose dispenses multiple fuels, the concentration of ethanol could be altered if someone were to pump a small amount of fuel with residual in the hose. Obtaining blend stock also could be a challenge. The EPA does not allow E15 the same volatility waiver as E10, so a different blend stock is needed. (Adding ethanol to gasoline bumps up volatility.) E10 has a waiver because it reduces volatile organic compound pollution enough to compensate for higher volatility. For E15 to be sold legally during summer, it must be a blend with reformulated gasoline.

Even with such roadblocks, some marketers are ahead of the curve and optimistic for the long run. States can pursue their own regulations; Illinois, Iowa and Kansas, do not have regulations preventing the fuel's sale or use.

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