Ethanol slashed | Lower demand and a huge harvest will pressure prices
Ever-increasing ethanol production, which has been the growth story of the bull market in crops since 2006, might be ending.
The U.S. Environmental Protection Agency’s plan to slash the amount of ethanol it would force fuel makers to include in gasoline next year has surprised many who hoped the story would go on for many years to come.
“The industry is basically built around ever-expanding demand for ethanol, and now it’s turned the other way, at least within North America,” said Chuck Penner of LeftField Commodity Research.
It adds a pall on the already-darkening outlook for crop prices for the next couple of years, said Darin Newsom of DTN. People will no longer feel the need to chase corn supplies to ensure they will have enough.
It will also allow commercial users to relax and remove an incentive to put their money into crops such as corn.
“From an investor’s point of view, there’s even less reason to get interested in corn,” said Newsom.
The EPA, which administers the Renewable Fuel Standard mandate, said Nov. 15 that it was cutting the 2014 grain-based ethanol fuel inclusion minimum to 13 billion gallons from the 14.4 billion gallons required this year.
The standard boosts ethanol production by forcing fuel makers to include certain amounts of biofuel in their petroleum products.
Corn, the main ethanol feedstock, has seen the required amount in-crease steadily in recent years, and many had hoped to see the U.S. government increase inclusion rates further by moving to a 15 percent ethanol-in-gasoline standard.
However, the U.S. government now seems likely to stick with a 10 percent rate, ending the growth of corn needed to supply the ethanol industry.
The slump in demand adds another element of worry to a corn market that is already seeing a huge U.S. crop come into the system and question marks hanging over demand that is still part of the official outlook for corn.
Newsom said corn exports, ethanol production levels and livestock consumption are all likely to end up lower than now projected, leading to bigger ending stocks of corn than at any time since 2008-09.
Any overall global weakening of demand will make corn supplies seem increasingly onerous after high corn production this year and three years of falling domestic demand for corn because of high prices.
The reduction in the ethanol mandate won’t necessarily hit the market directly in coming months.
Penner said ethanol producers are making good profits because of falling corn prices, so they’ll keep producing and may even build new plants.
However, how ethanol producers fare once they have surpassed the 13 billion gallon limit will show whether the biofuel industry can keep ex-panding.
“If they can easily move it offshore at a profit, it’ll continue to use corn, to spit out DDGs and we’ll go on our merry way without too much impact,” said Penner. “But if we have a hard time exporting it, we will see 13 billion gallons as a hard cap.”
The overall bull market in crop prices was driven by ever-growing demand for supplies that farmers around the world were having trouble matching with new production. The bull market seemed unassailable as long as demand grew more than production.
However, with big crops produced this year in many parts of the Northern Hemisphere, especially in the United States and Canada, the market dynamic has shifted to one of supply growth outpacing demand growth.
Some analysts think a big South American crop this winter would imperil the bull market, while big northern hemisphere crops next year would kill it.
Many observers have considered the U.S. ethanol demand as the single most important factor driving the bull market.
As a result, analysts and investors closely watch any change in that demand as a sign of general crop market dynamism.