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Corn+Soybean Digest

Uncertainties Cloud Corn Ethanol’s Future | Oil Prices and Government Policy are Key Variables


Conditions are good but not great for U.S. corn ethanol producers, says Chad Hart, Iowa State University agricultural economist.

“Ethanol plants continue to run at a fairly decent clip,” says Hart. “They can handle high corn prices, but they’ve got to have high crude-oil prices to go with it, and that’s what they’ve got now with $96.89 (as of July 5).”

Rising oil and gas prices have supported ethanol profitability even as corn prices have climbed to near-record levels, confirms John Urbanchuk, technical director and environmental economist at Cardno Entrix, an environmental and natural resource-consulting firm. “The ethanol industry is surprisingly strong, despite very, very high corn prices,” he says. “And corn feedstocks represent two-thirds to 70% of the cost of making ethanol.”

Ethanol prices tend to track crude oil and gasoline prices, says Urbanchuk. “Virtually all the gas sold in the U.S. now has a 10% ethanol blend, depending on location.”

As long as oil prices stay above $60-80/barrel, the ethanol industry should be fine, says Urbanchuk. “I see a collapse in oil prices as a more likely scenario than a collapse in corn prices, because corn has more uses than just ethanol.”

However, fuel markets are still fickle, and both gasoline and ethanol prices and profits could easily drop lower, as they have suddenly in the past, Urbanchuk says.

 “The last gasoline and commodity-price bubble burst was in December 2008,” says Urbanchuk. “On July 3, 2008, we had a combination of very high oil prices ($145.31/barrel), gasoline prices ($3.39/gal. before taxes) and ethanol prices ($2.81½/gal.). Yet, by Dec. 23, oil had fallen to $30.28/barrel, gasoline had dipped to 85.7¢/gal. (before taxes) and ethanol dropped to 100.48¢/gal.”

Hart concurs. “What’s really slowed the ethanol industry down before is low oil prices,” he says. “That’s what shut the ethanol plants down in late 2008; it wasn’t so much the high corn prices that did it.”

The U.S. ethanol industry is much stronger now than it was at the end of 2008, says Urbanchuk. “Very low ethanol profitability at that time also coincided with a financial crisis that made it hard to sustain any debt and/or obtain more credit,” he says. “Now, the financial crisis in the banking industry is largely over and the ethanol industry has restructured and strengthened to better weather challenging economic situations.”

Uncertainties still loom – and not just from economic worries, however, says Hart. “The No. 1 uncertainty in the industry is about government policy,” he says. “Government support for ethanol is now under pressure, given the budget deficits.”

Political support for the ethanol industry has eroded recently, as witnessed by a Senate vote in June to discontinue federal ethanol subsidies, but not so much that Congress is likely to totally abandon the industry, says Urbanchuk. “I continue to doubt we will see legislative changes in 2011 that removes all support for ethanol,” he says. “The real threat to ethanol plant profitability is extremely low oil prices. So, the idea is to maintain a tax incentive that provides a floor for ethanol prices if oil prices drop too low, but one that also removes the economic impact on taxpayers. I think it is very doable and likely to happen.”

Political pressure is also building to move the renewable-fuels industry away from corn as a feedstock in favor of non-food, non-feed-grain material, says Hart. “That pressure has been here at least since 2007, when the Renewable Fuel Standard (RFS) first passed Congress,” he says. “The RFS calls for producing 36 billion gallons of renewable fuels/year by 2022, but it also caps out corn-based ethanol at 15 billion gallons/year by 2015.”

The big challenge for the ethanol industry will be to learn how to keep growing as it moves past corn to other feedstocks, agrees Urbanchuk. “However, I don’t see the demise of corn ethanol any time soon,” he adds. “The U.S. ethanol industry already has the ability to produce 15 billion gallons/year from corn without breaking a sweat. Feedstocks other than corn still face many difficult technical and infrastructural challenges, making it hard for those feedstocks to meet the 2022 RFS time period.”

Today’s farmers will likely live a long time before seeing corn ethanol become obsolete, says Urbanchuk. Instead of a big cutback in corn-ethanol production, we’ll see a more diverse, stable feedstock base, he says.

Demand for corn is certainly going to remain robust throughout the next decade, no matter what uses people find for it, adds Urbanchuk. “It’s important to realize and appreciate that the renewable fuels industry is alive and well and will continue to grow,” he says. “Corn ethanol will also remain a big part of that industry for many years to come.”

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