Low Ethanol Demand is Hurting Corn Prices

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Low Ethanol Demand is Hurting Corn Prices

Dan Salerno / Director of Sales | July 16, 2013

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Demand for ethanol is hitting a wall. Oil companies are resisting the use of the corn-made fuel in their gasoline, now more than ever. The cost of producing ethanol is considerably more expensive than that of producing gas, due to three straight years of less-than-optimal corn harvests, which have raised corn prices.

Gasoline or ethanol-blended fuel?

Even though the Environmental Protection Agency last year approved the use of E15 (gasoline containing15% ethanol) – in all light duty vehicles made in 2001 or after – the petroleum and service station industry has made almost no effort to sell the fuel.

The U.S. consumes about 130 billion gallons of gasoline annually. “Certainly large oil companies generally do not want to let ethanol take more market share,” says Chris Hurt, an agricultural economist at Purdue University in West Lafayette, Ind. “I don’t think it’s a secret that the oil companies are not pro ethanol.”

The U.S. produced 13.3 billion gallons of ethanol in 2012, up substantially from only a few years earlier. The increase is the result of the Renewable Fuel Standard (RFS), a government mandate that requires greater and greater amounts of renewable fuels to be produced annually.

Corn Costs Have Gone Up.

Since RFS standards were set in 2005, the price of a bushel of corn has increased significantly. As prices rose, costs soon followed. Three consecutive years of smaller-than-expected crops – the past year’s deficit due in large part to drought – doesn’t bode well for farmers who might be hoping for increased corn use for ethanol over the next couple of years.

The Pumps Aren’t There.

The retail gasoline industry argues that the gasoline-blend offerings E10 (10% ethanol), E15 (15% ethanol), and E85 (85% ethanol), confuse consumers, according to Purdue’s Hurt. A number of vehicles (many produced by GM) have been capable of using E85 for several years but few gas pumps exist to deliver that fuel.

The retail gas industry faces significant costs to install separate pumps for the various ethanol blends. Likewise for blender pumps, which let customers select 10%, 15% or 85% ethanol fuel. While most vehicles can use E10 or E15, only specially made engines can use E85.

Without general acceptance of either E15 or E85, according to Hurt, the ethanol business has hit what is known as the “blending wall.”

What’s the Future Hold?

Hurt believes that high corn prices coupled with industry and consumer hesitance for greater ethanol blends will keep ethanol production level through 2016. So, demand growth will slow, and supply will have a chance to catch up. That means corn prices will moderate from levels of the last two years, if there is a return to normal production.

Fortunately for farmers corn prices are not expected to collapse—and 2013’s late planting start due to cold and wet conditions could keep this year’s production down and support market prices

 

 

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