Higher U.S. ethanol content may spur demand for corn

The biggest customer of American corn may be developing more of an appetite for the crop because of a recent policy development.

On April 2, the U.S. Environmental Protection Agency approved E15, which is gasoline with a 15 percent blend of ethanol. Pumps had previously been allowed to sell only E10 or 10 percent blends.

Other steps must be taken at the federal, state and local levels before E15 will be seen in gas stations, but it is getting close to being a commercial reality after three years of intense lobbying from the corn and ethanol industries.

“We hope that within a matter of months we can get this important blend into vehicles to help decrease our nation’s reliance on foreign oil and help bring gas prices down,” said Garry Niemeyer, president of the National Corn Growers Association.

The U.S. Department of Agriculture estimates the ethanol industry will consume 40 percent of the 2011 corn crop. That share could rise in 2012 because of the approval of E15 blends.

“What it does is it really opens up the potential for demand for corn ethanol,” said Nick Paulson, assistant professor of agricultural and consumer economics at the University of Illinois.

The United States has established a federal mandate for 13.2 billion gallons of ethanol to be blended into the fuel supply in 2012. Paulson said it was becoming increasingly difficult to meet the ever-growing federal mandate when capped at a 10 percent blend.

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The mandate establishes a floor for ethanol demand, but it is an attractive commodity these days because it sells for about $1 per gallon cheaper on average than gasoline.

“Refiners would like to blend even more ethanol than they are, but they have been running up against that 10 percent blend wall,” said Paulson.

The Renewable Fuels Association says E15 could be available as early as summer in the U.S. Midwest, where states have already begun to address their regulatory requirements for the fuel blend.

“We’d encourage all Americans to ask their local filling station how soon they will see more affordable E15,” said Tom Buis, chief executive officer of Growth Energy, another ethanol advocacy group.

A summer launch of E15 at the pumps would likely boost corn demand from the ethanol industry, but Paulson said there is also a scenario where fuel blenders could use less corn ethanol than anticipated.

That’s because there is more concern than usual that the U.S. could be facing widespread drought in 2012. If that happens, it could result in a short corn crop, higher corn prices and reduced margins for blending ethanol.

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Under that scenario, blenders would reduce ethanol purchases to the requirements stipulated in the federal mandate.

While some in the corn industry cite the mandate as a reason to remain bullish on corn prices, Paulson has a theory that corn demand from the ethanol sector could be as much as 19 percent lower than what the mandate suggests.

Ethanol is assigned a renewable identification number (RIN) when a batch is produced. Refiners submit that number to the EPA when they blend the batch into the fuel supply to prove they have met their obligations under the mandate.

However, blenders have been blending more ethanol than required under federal law since 2007 and stockpiling those RINs.

Paulson estimates there are 2.5 billion gallons worth of stockpiled RINs, or about 19 percent of the 2012 ethanol mandate. That represents 900 million bushels of corn demand that might not materialize under a scenario in which prices are rising.

Corn prices would still rise because of the short crop, but the increase might not be as big as people had anticipated, he said.

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