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Lower Mandates for Ethanol Will Likely Affect Ag Prices

Lower Mandates for Ethanol Will Likely Affect Ag Prices
Proposed reduction in amount of alternative fuel required to be produced will impact ethanol producers.

Actions have consequences. When authorities decided to propose regulations that drop the required mandates on the amount of alternative fuel, including ethanol, that must be produced in the coming year, it may have been good news for livestock producers, but not necessarily good news for crop producers.

The potential lowered mandate will mean that ethanol plants may have more capacity to produce ethanol than there is market for their product.

Less demand: Ethanol plants may have less demand for corn if they can't move as much ethanol due to lower required production mandates and a change in driving habits.

The decision was a long time coming. Some groups called for a reduction in the mandates when corn hit high prices more than a year ago. Now corn is at lower prices, but the Environmental Protection Agency, manager of the renewable fuel mandate, proposed lower volumes anyway. The mandate is simply a directive as to how much of the fuel market had to be made up by alternative fuels by a certain point in time.

Jason Henderson, Director of Purdue University Extension, reports that Wally Tyner of Purdue Ag Economics has completed a study that shows that the drop in the mandated amount of ethanol which must be produced will mean hard times for the ethanol industry, at least in the short run. Indiana has about 12 operating ethanol plants that convert corn into ethanol. Most of these plants produce ethanol to be blended into gasoline.

Henderson says another factor at work will not help the ethanol industry either. Americans cut back on driving since the recession, and have not bought as much gas as analysts predicted they would by this point in time. At one point based on the amount of gasoline projected to be used, ethanol consumption could have been 15 billion gallons by 2015. The ethanol industry nationwide has built about 15 billion gallons of annual production capacity. But because of lower gasoline consumption alone, the projection is now that 13 billion gallons of ethanol would be needed in 2015. That leaves two billion gallons of excess capacity. Supply and demand will likely take over, he concludes.

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