By Gavin Maguire, a Reuters market analyst. The opinions expressed are his own.
CHICAGO, Feb 20 – Neither producers nor consumers of U.S. ethanol seem to expect the Environmental Protection Agency to follow-through on its proposal to cut the 2014 biofuels usage mandate, judging by the latest supply-and-demand volumes released by the Energy Information Administration.
Last November, the EPA, which enforces the U.S. renewable energy policy mandates, announced its proposal to trim the usage mandate amid concerns that grain use by fuel producers was hurting the food industry. But the robust pace of production and consumption of ethanol so far this year indicates that the most active participants in this market do not expect meaningful change to industry fundamentals any time soon.
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POLICY POLEMIC
Large-scale fuel production from corn has been one of the most divisive agricultural and energy policy initiatives of the past 20 years, sparking a heated debate that still endures across industries and society.
Livestock industry lobbying has been deemed the chief driver behind the recent EPA proposals to reduce the usage mandate. Livestock firms and other food producers argued that industrial-scale grain purchasing by fuel manufacturers was diverting crops and driving up food prices.
And certainly the rapid ramp up in U.S. ethanol production since the 2005 launch of the current renewable fuel policy roadmap (the Renewable Fuels Standard (RFS)) has coincided with an historic spate of crop price strength and volatility.
But many market observers found it odd that the EPA only felt fit to act last year, after corn prices had slumped to multi-year lows amid a bumper crop, especially as livestock production margins sprang to near record highs around that time.
Further, it has been clear for some time that the ethanol industry’s corn demand growth rate has plateaued as the ethanol-based supply-side components of the RFS had been achieved.
For these reasons, many view the EPA’s proposals to cut mandated ethanol use now as closing the stable door after the horse has bolted. It is too late to undo any price-damage done during the period when ethanol corn demand grew by 20-30 percent per year, and likely to have only limited or no impact on other grain-consuming industries now that corn-demand from ethanol production has reached a steady state.
In addition, the EPA allowed for the public to weigh in on its proposal during a comment period that ran through the end of January, and reportedly received more than 15,000 comments to suggest the proposed changes were not uniformly approved of.
NO CHANGE
Bemused by the EPA’s timing, many grain and ethanol market observers also expect the proposed adjustment to ethanol usage targets will have little to no impact on demand for the fuel.
This is because the fuel blenders who mix ethanol into the nation’s fuel stream are motivated mainly by the market, and very little by policy mandates. Currently blenders are faced with a compelling economic incentive to mix in large quantities of ethanol into the fuel supply as ethanol prices remain cheap relative to gasoline.
This motivation to ramp up ethanol use is not just evident in prices. The EIA’s weekly reports on ethanol fuel production, use and stocks reveal a similar story, with actual demand from blenders hitting a record for this time of year so far in 2014.
Ethanol production has also been robust this year, thanks to positive margins for manufacturers who can acquire corn at the lowest price in roughly three years and profitably process it into ethanol and distillers’ grains, a popular feed ingredient.
Ethanol inventories, while climbing by about 6 percent since the start of the year, also remain historically tight for this time of year.
This combination of robust demand, positive production margins and relatively tight inventories has emboldened ethanol producers and spurred confidence that no significant change to market dynamics will occur any time soon, even with the uncertainty surrounding the EPA’s mandate proposals.
Refiners and other market traders seem to hold a similar view, judging by the recent climb in Renewable Identification Number (RIN) credit prices which suggest demand for alternative fuels will remain strong for the foreseeable future.
2014 ethanol RIN prices slumped to around 20 cents a gallon following the EPA’s November announcement, but have rebounded to above 50 cents this year as skepticism mounts about whether the EPA proposals will have any real impact on demand, or will be followed through on at all.
With the EPA’s official comment period only just finished, it may still take several months before the EPA announces its final ruling on this matter. But in the interim it appears that ethanol producers, consumers and traders alike all feel that very little real change is likely any time soon.
