Jury still out on U.S. E15 ethanol blend’s impact on demand

Some say allowing a 15 percent ethanol blend in gasoline will hike corn demand by 2.75 billion bu., but others predict a much lower amount

A grain market analyst doubts that another biofuel-based market rally is on the horizon.

Dan Basse, president of AgResource Company, is not holding out hope that the move to year-round E15 ethanol blends in the United States and B30 biodiesel blends in Indonesia will lead to surging corn and vegetable oil demand.

The U.S. Environmental Protection Agency recently approved year-round sales of E15, which is gasoline containing a 15 percent blend of ethanol. Sales of the blend had previously been prohibited between June 1 and Sept. 15.

The policy change will result in higher sales of corn-based ethanol in the United States, but there is a huge discrepancy in estimates of how much more.

Reuters reports that the chief executive officer of Brazil’s Copersucar SA, which is the world’s largest sugar and ethanol trader, expects year-round E15 to boost U.S. ethanol demand by 50 percent once fully implemented.

“The market potential for ethanol in the U.S., as E15 is gradually implemented, is significant,” said Joao Roberto Teixeira.

If he is right, that would be a massive market-mover for corn and other grain prices.

The U.S. ethanol sector consumes 5.5 billion bushels of corn every year, so a 50 percent increase in demand would eat up another 2.75 billion bu. of the crop.

Basse considers that estimate laughable. He said the existing E15 retail infrastructure in the U.S. can’t come anywhere close to meeting that type of surge in demand.

“It’s not going to happen,” he said.

AgResource believes year-round E15 will result in an extra 80 to 85 million bu. of annual corn demand.

“It’s no panacea for agriculture. It’s no demand driver,” said Basse.

Allendale Inc. has pegged the impact even lower at 15 to 30 million bu. of corn.

Basse is more concerned about declining ethanol export demand because of high corn prices.

He believes Brazil will cut back on imports from the U.S. as corn ethanol prices rise, resulting in the loss of 100 to 150 million bu. of corn demand.

“Whatever we gain in E15 will be subtracted because of high corn prices,” he said.

Basse believes the head of Copersucar was trying to pull a fast one on the company’s Brazilian shareholders, who may not know a lot about the U.S. ethanol market.

“It’s all about increasing share value and you want to talk boldly, and sometimes wrongly, about where they see ethanol headed,” he said.

Basse is also skeptical about reports that Indonesia is going to mandate that all diesel sold in that country must contain 30 percent palm- based biodiesel starting next year, up from 20 percent today.

Reuters reports that the country has begun testing B30 blends on cars and trucks and will soon be testing it in trains, ships and heavy machinery.

The switch to B30 would result in nine billion litres of annual palm oil demand from Indonesia’s biodiesel sector, up from 6.2 billion litres today, according to the Reuters’ story.

Basse isn’t buying it.

“Indonesia has talked big for many, many years and acted small,” he said.

He doesn’t believe the economic incentive is there to use palm oil biodiesel with crude oil prices hovering in the US$50 to $55 per barrel range.

Basse said Indonesia is constantly setting ambitious goals for mopping up palm oil supplies but seldom follows through on them.

He said the world is oversupplied with vegetable oil and needs some sort of weather calamity to bring supply and demand back in balance.

“What you need is something like an Indian monsoon failure or something like that,” said Basse.

India is the world’s largest vegetable oil importer.

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