American ethanol industry risks not meeting mandate

KISSIMMEE, Fla. — The U.S. ethanol industry has crashed into the blend wall.

Ethanol promoters have been warning for years that the 10 percent blend used in the vast majority of fuel pumps across the United States eventually won’t be good enough to meet the ever-expanding biofuel mandates.

That day has arrived.

U.S. gasoline consumption is expected to be 134 billion gallons in 2012-13, according to the Food and Agricultural Policy Research Institute.

Refiners typically blend ethanol at a 10 percent (E10) level, which would result in 13.4 billion gallons of ethanol demand.

The U.S. Renewable Fuel Standard calls for 13.8 billion gallons of ethanol use in 2013.

“We’re right there,” Chip Flory, editor of Pro Farmer, said during an interview at the 2013 Commodity Classic.

“We’re bumping right up against the blend wall.”

Arlan Suderman, senior market analyst with Water Street Advisory, said the wall limits the upside for corn prices.

“(It) is limiting the ability of new crop corn to be able to rally,” he said.

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Chad Hart, associate professor of economics at Iowa State University, doesn’t think the blend wall will impact corn prices until 2014 and 2015.

The U.S. Environmental Protection Agency has approved E15 blends for cars 2001 and newer and E85 blends for flex fuel vehicles.

While there isn’t much of either blend sold in the U.S. market, he feels there is likely enough to reach the 13.8 billion gallon corn ethanol mandate in 2013.

However, if nothing changes the industry will undoubtedly have trouble meeting the 2014 mandate of 14.4 billion gallons and the 2015 mandate of 15 billion gallons.

Those future mandates will force blenders to use up their stored renewable identification number (RIN) credits.

A RIN is a paper credit blenders earned in previous years when they blended more ethanol than they were obligated to under the federal mandate.

They can use those credits to meet current obligations without actually blending the ethanol. Hart estimates blenders are holding 2.5 to three billion gallons worth of RINs.

“You’re pulling some (corn) demand away as the RINs get utilized,” he said in an interview separate from the Commodity Classic event.

“Does it put in a hard ceiling (on corn prices)? No. But it does soften the upside.”

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The blend wall isn’t the only factor that could prompt blenders to start using RINs.

Ethanol has been trading at a sizable discount to gasoline prices since 2011. If ethanol prices rise in relation to gasoline, blenders will replace corn demand with RIN demand.

A shift to E15 blends would eliminate the blend wall concern in the corn market.

The EPA has approved the blend but few fuel retailers have installed E15 pumps and consumers are wary about gassing up with E15.

“We’ve told our consumers for the past 30 years that a 10 percent blend was about as much as their car could handle,” said Hart.

“Now we’re going to turn around and say, ‘forget that, 15 percent is as much as your car can handle.’ That’s going to take some time for consumers to be willing to test that.”

Suderman said if gasoline prices remain high, market forces will shift towards E15 and E85 blends, helping corn demand recover.

There’s also a possibility of the EPA exploring E30 blends. He knows somebody in the biofuel industry who recently met with EPA officials and they had a lot of questions about E30, which is an ethanol blend that provides the optimal fuel economy.

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