EDITOR'S NOTE: The Linn Group, which partners with Farm Futures for the Farm Futures Market Center provides weekly in-depth reports on key industry areas. The ethanol report offers you a look at key factors impacting this important part of the demand side of the industry.
The "Great Drought of 2012" continues to exact its toll on US corn production. It feels like an eternity has passed since USDA's June projections of a 14.8 billion bushel crop and a resulting 1.8+ bil bu carryout. The USDA responded quite forcefully in July (12.97 bil bu print), but private estimates are heading south fast, with a handful below 11.0 billion – a six year low! These are historic times; perhaps never before has the market faced a crop disaster of this magnitude with stocks to use ratios – both here and globally - so tight. Expectations of a comfortable 12/13 corn situation withered along with the plants in the blistering Midwest heat. All corn-consuming sectors will be required to make sacrifices, and ethanol will no doubt have its share of the burden to bear.
The knee-jerk cry has been to reduce (or in the extreme, totally eliminate), the ethanol mandates (RFS). Given the severity of the drought, we feel it is certainly possible, but it will not be as easy or expedient as many believe. Legally, changing the RFS either requires Congressional action, or the EPA must grant an "economic hardship waiver" – such a path was attempted in 2008 with no success, plus it requires a 30 day minimum comment period. It is an election year, so anything is possible!
Transport and packaging costs would rise accordingly, representing an equally large burden on consumer prices. It is likely no coincidence that RBOB futures began rallying around the same time that the trading floor was buzzing with the rumor that a 20% ethanol mandate reduction was imminent. We still are not certain where the "20%" claim came from; traders may be confusing this with the upcoming annual release of the EPA's RFS guidelines for 2013, where cellulosic ethanol mandates will need to be cut. Hasty government action has proved to be disastrous to the grain trade in the past; let the market do its job and ration where it feels appropriate!
Get the complete report by clicking on the download link below.