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Higher ethanol fuel called no saviour for corn

The Environmental Protection Agency in the U.S. is considering allowing fuel with 15 percent ethanol to be used in summer

Don’t expect expanded access to E15 ethanol blends to lift corn prices out of their doldrums, say analysts.

“I am a skeptic for a variety of reasons that E15 is going to make any difference in the short-run at all to the demand for corn,” said Scott Irwin, an agricultural economist with the University of Illinois.

In October 2018, U.S. President Donald Trump instructed the U.S. Environmental Protection Agency (EPA) to lift summertime restrictions on the sale of E15 blends, a fuel blend of 15 percent ethanol to 85 percent gasoline. Currently, a 10 percent ethanol blend is the maximum allowed during summer.

The EPA released its proposed rule on year-round E15 on March 12. It would make the fuel available between June and September. The comment period on the rule closed on April 29.

The National Corn Growers Association and ethanol industry groups like Growth Energy are urging the EPA to get the new rule in place by June 1.

“Unless the EPA acts quickly the summer market for E15 will be lost, which means higher fuel prices for consumers and another devastating blow to America’s rural workforce,” Growth Energy chief executive officer Emily Skor said in a news release.

The organizations say the rule would lead to a big uptick in corn-ethanol demand.

Rich Nelson, chief strategist with Allendale Inc., isn’t buying that. He is more concerned about slumping corn demand from the ethanol sector.

The U.S. Department of Agriculture is forecasting 5.5 billion bushels of corn demand from ethanol in 2018-19. That represents 38 percent of total estimated U.S. corn demand.

Nelson noted that U.S. ethanol plants have been operating at a conversion rate of 2.94 gallons of ethanol per bushel of corn, which is 3.2 percent better than last year.

“We have some people saying the fall harvest had a better quality kernel offering more starch and therefore more sugar,” he said.

Others say ethanol plants are using better enzymes that are more efficient.

In addition to those efficiency gains reducing corn demand, ethanol plants are not producing as much of the fuel as last year because margins have been poor due to low fuel prices.

The bottom line is Allendale doesn’t think the USDA’s target is achievable. E15 could help spur demand but only to the tune of 15 to 30 million bu. of corn and that is not enough to fill the hole in demand.

Allendale is forecasting 2.08 billion bu. of corn carryout in 2018-19, which is 45 million bu. more than the USDA’s estimate due to reduced exports and ethanol demand.

Nelson expects the situation to get worse in 2019-20 with carryout climbing to 2.114 billion bu.

That is because production will be up 214 million bu. despite farmers planting one million fewer acres than they originally thought due to wet conditions.

Yields will also be down an estimated 1.5 percent due to late seeding but that won’t be enough to offset the huge acreage swing out of soybeans and into corn.

Nelson said there could be some bullish developments on the horizon if the U.S. and China agree to a trade pact that spurs corn and ethanol exports to China.

Growth Energy is long-term bullish on corn. It believes summer access to E15 blends will increase ethanol consumption by 1.3 billion gallons per year within five years. That would require an extra 442 million bu. of corn.

Irwin shares Nelson’s skepticism of that estimate.

“I just don’t see it,” he said.

“I honestly hope I’m wrong given that I’m considered an ag friendly economist.”

For one thing, refiners don’t want to sell E15 blends and plan to seek an injunction to have the EPA’s ruling stayed.

“They’re clearly going to sue to stop it,” said Irwin.

There are 1,800 fuel stations in the U.S. equipped to sell E15, which is about 1.6 percent of all the stations in the U.S. Growth Energy claims another 3,500 sites want to offer the fuel and are awaiting the EPA rule.

But Irwin thinks there are many other retailers who are leery to make infrastructure investments with so much uncertainty swirling around.

Many refiners own fuel stations and have no intention to equip them to sell E15 blends.

There are concerns about liability issues given that E15 is only approved for light duty vehicles manufactured in 2001 or later.

Some manufacturers still don’t allow E15 for their engine warranties. Some states don’t allow it either, such as California and New York.

And then there is the grim long-term outlook for fuel consumption in general.

“You put that picture together and I just don’t see a scenario where E15 is going to take off like the U.S. ethanol industry is advertising,” said Irwin.

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