What's the Future for Corn Ethanol?

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What's the Future for Corn Ethanol?

19 April 2012

ANALYSIS - Could the glory days for corn ethanol production in the US be grinding to a halt? And could there be a shift away from using corn for fuel production easing prices on grains used for feed and food?

Certainly the USDA chief economist seems to indicate that growth of the corn ethanol sector is not to be expected, writes Chris Harris.

At the beginning of the year in his outlook speech, Mr Glauber said: "After increasing by almost 700 million bushels per year over 2005-10, corn use for ethanol has flattened and is projected to fall by 21 million bushels in 2011/12."

He added that under the energy act the maximum amount of conventional biofuels that can be applied to the Renewable Fuel Standard is 13.2 billion gallons. Current production capacity is 14.75 billion gallons.

However, he said that with the removal of tax credits at the beginning of the year and duties on imported ethanol, "corn-based ethanol produced beyond the 13.2-billion-gallon mandate will have to be attractively priced to be profitably blended with gasoline".

Mr Glauber repeated this forecast of flat production of corn based ethanol to a meeting of agricultural economists last week in Ottawa.

He said that while the sector will hold on to its gains further growth is against the odds.

Part of the problem is that there is a reduction in demand for fuel in the US because of the contraction in the economy with current forecasts for the consumption of blended gasoline for 2013 being 134 billion gallons - 16 billion gallons less than in 2007.

Pace of Ethanol Production Slowing

Illinois University economist Darrel Good said that the use of corn for ethanol and co-product production during the current year is forecast by the USDA at 5 billion bushels, 21 million less than used last year.

But he added that while the pace of ethanol production has slowed, it is above that needed to reach the projected level of corn use for the year.

And the latest World Agricultural Supply and Demand Estimates report from the USDA echoes the view that there is a drop in the demand for corn ethanol.

"Corn used to produce ethanol in 2011/12 is projected at 5.0 billion bushels, unchanged again this month. The latest monthly data from the Energy Information Administration (EIA) indicates that average daily ethanol disappearance fell to a 23-month low in January pushing ethanol stocks to a new record high. Weekly EIA ethanol production data suggest average daily ethanol production during February and March has continued to fall hitting its lowest level since early last fall," the report says.

With a reduction in consumption and a withdrawal of incentives for corn based ethanol the only variable that could boost production and requirements would be if the if there were changes to the Renewable Fuel Standard or an increase in the blend wall.

And an announcement from the Environmental Protection Agency that it has approved E15 - the use of 15 per cent ethanol blended with gasoline - as a registered fuel.

This, naturally, has received the approval of the ethanol producers and the corn growers who see it as a lifeline after they were forced to go it alone with the removal of tax credits.

Introduction of E15 Blended Fuel

The introduction of the rise from E10 blended fuel to E15, however, is likely to take some time.

The US Renewable Fuels Association said: "Americans showed a strong desire to increase their use of domestic ethanol. When asked how likely they would be to purchase a fuel with more domestic ethanol when available (specifically E15), 58 per cent of respondents said they were very likely or somewhat likely."

Jerry Mohr chair of the Iowa Corn Usage and Production committee of the Iowa Corn Growers Association said: "The approval of E15 by the EPA is just one hurdle in getting E15 into the marketplace.

"The ultimate goal of getting E15 to the marketplace is to increase the amount of renewable fuels available to consumers, which can help lower fuel costs and reduce our dependence on foreign oil."

In the meantime, the corn growers are also mounting a defence of the Renewable Fuel Standard, which they fear could be cut reducing the demand for corn for ethanol further.

In a letter to Iowa's Congressional Delegation, Iowa Corn Growers Association President Kevin Ross called on the delegation to stand with Iowa's farmers and support the RFS. He also asked that they oppose any legislation that results in the elimination or reduction in the amount of corn that can be used as a feedstock for ethanol and oppose legislation that would prohibit the use of fuels containing more than 10 per cent ethanol.

Support for Advanced Biofuels

With the continual pressure being put on the ethanol industry over production using corn, the industry itself is also increasing the lobbying for support for ethanol production using alternative sources of raw material.

The Renewable Fuels Association said that people who took part in a poll the organisation conducted "poll responded very favorably to the continued efforts to bring cellulosic ethanol production to commercial scale through the use of targeted tax policies.

"Sixty-five per cent said they supported such incentives to help expand cellulosic ethanol production. By comparison, 69 per cent said they opposed tax subsidies and other incentives for petroleum companies."

And recently the Biotechnology Industry Organization (BIO) joined 100 renewable energy, energy efficiency, farm, ranch, commodity, environmental, and other groups in a letter to the leaders of the House and Senate Agriculture Committees asking for reauthorisation and funding of Farm Bill energy title programmes.

Brent Erickson, executive vice president of BIO's Industrial and Environmental Section, said: "Congress can't afford to wait to boost commercialisation of advanced biofuels and revitalise rural America."

However, any boost to production of ethanol - no matter what the source material - relies on consumer demand.

And Dr Glauber concludes that slowing demand for ethanol means that corn stocks will likely increase in 2012/12 assuming a return to trend yields. This should help moderate record feed grain prices. Livestock markets should see increasing margins towards the end of 2012 as the new crop is harvested bringing down feed costs.

So a reduction in corn ethanol demand could in the long run be good news for livestock farmers.