will suspending the ethanol mandate actually affect corn prices?

Two recent economic analyses support the conclusion that waiving or modifying policy that encourages ethanol production from corn would have little impact on corn prices.  There have been calls to waive or modify the RFS due to the massive drought conditions and projected impact on corn supply and corn prices.  The results of the analysis are described and linked here:

http://westernfarmpress.com/government/studies-refute-rfs-waiver-claims

This New York Times article talks about the issue:

http://www.nytimes.com/2012/08/17/business/energy-environment/ethanol-quota-debated-by-corn-farmers-and-meat-industry.html?partner=rss&emc=rss

“At issue is whether to suspend a five-year-old federal mandate requiring more ethanol in gasoline each year, a policy that has diverted almost half of the domestic corn supply from animal feedlots to ethanol refineries..”

39% is not really “almost half”, plus when you calculate the DDGS that return to the animal feed market after ethanol extraction, the amount of corn consumed is more like 25%

In addition, when corn prices are this high, the economics of ethanol production don’t work and don’t contribute the price increase:

“But the ethanol industry says that its corn consumption is down 12 percent since the start of the summer and that weekly ethanol production is at a two-year low. As corn prices have risen, refineries have scaled back production, idled dozens of plants and sold ethanol inventories. As a result, the industry may consume 10 percent less of this summer’s crop than last year’s, government and industry officials said.”

At least on the investors side, there is little belief that anything will change within the RFS, mostly because there are lots of credits floating around that can be used to fulfill the RFS, and are much cheaper than trying to make ethanol with expensive corn:

http://www.platts.com/RSSFeedDetailedNews/RSSFeed/Oil/6530514

http://www.businessweek.com/news/2012-08-07/morgan-stanley-says-policy-changes-won-t-hurt-ethanol-demand

In older news, I thought I would pass on some good news for bioenergy.  Despite criticism of military investment in biofuels, the senate approved a defense bill including that funding, as well as the PTC (the wind energy credit), and the algae bioenergy tax credit.  The senate & house still have to agree on final versions of these bills.

http://www.biofuelsdigest.com/bdigest/2012/08/03/triple-win-for-biofuels-on-capitol-hill-100m-for-military-biofuels-tax-extenders-package-algae-wins-tax-credit-parity/

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2 Responses to will suspending the ethanol mandate actually affect corn prices?

  1. Paul says:

    Here is another article that makes more good points:

    http://www.huffingtonpost.com/2012/08/24/ethanol-mandate-corn-drought_n_1826740.html

    Even without the standard, a third of the U.S. gasoline supply must contain ethanol to meet unrelated clean air rules, mostly in California and on the East Coast. No other available substance can oxygenate gasoline as effectively, helping it burn more cleanly.

    More importantly, ethanol is as much as $1 cheaper than other types of octane boosters like reformate, which refiners use to increase the efficiency of their fuel.

    “Even with a reduction in the waiver, there is still economic incentive for the fuel industry to use ethanol as an oxygenate,” said Maureen Cannon, a chemicals and agricultural business specialist and vice president of Valence Group, a investment bank specializing in chemicals.

    “The addition of ethanol has allowed refiners to use gasoline with an octane level of 84 and then blend with ethanol to get a higher octane to reach the 87 level that we buy,” said Cannon.
    According to J.P. Morgan, the average spread between 87 and 93 octane has averaged about 13 cents over the last five years.

    “This implies that, in the long term, the octane premium for ethanol is likely close to $0.63 a gallon over 84-octane gasoline,” said J.P. Morgan in a note to clients.

    It is 25 to 30 cents cheaper than CBOB on the spot market, according to a trader with a large U.S. gasoline blender who declined to be named.

  2. John says:

    Speaking of correcting for DDGS when estimating the fraction of the US corn crop consumed for ethanol, POET is claiming that the gross 40% number should be corrected down to 16% after accounting for animal feed:
    http://articles.marketwatch.com/2012-08-22/markets/33316971_1_ethanol-requirement-corn-crop-renewable-fuels-association/3

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