Corn, ethanol relationship reverse; E85 markets respond

By Susanne Retka Schill | October 10, 2013

Economists continue to evaluate the changing dynamics in the ethanol market. Two recent FarmDocDaily posts look at the recent inversion in ethanol and corn price relationships and the potential for increased E85 sales volumes.

The market relationships between ethanol and corn prices in place for much of the ethanol boom have reversed. “As long as the E10 blendwall is binding, the price of corn drives the price of ethanol,” University of Illinois ag economist Scott Irwin wrote in a recent FarmDocDaily analysis, “Ethanol Prices Drive Corn Prices, Right?.”

As such, the pricing of corn at the margin is now primarily determined in the domestic and foreign feed grain markets, he said. “In this sense, it’s ‘back to the future’ for the corn market until the E10 blendwall is breached.”

Irwin reviewed recent studies that have sought to sort out the impact of ethanol production from other factors, such as weather and the general economy, citing one study that estimated the price of corn between 2006 and 2012 was 34 percent higher than otherwise would have been the case due to rising ethanol production. “Other studies show higher or lower percentages, but the main conclusion remains. We now also know that energy and corn markets have become directly linked through the ethanol channel.”

Irwin presented a number of charts to demonstrate the relationships, and how’ve they’ve recently changed due to the blend wall, showing the relationships between gasoline and ethanol demand, supply and prices. To view the charts and accompanying analyses click here. 

Another University of Illinois economist, Nick Paulsen, teamed up with USDA economists Seth Meyer and Rob Johanasson, in an analysis “E85 and the Blend Wall,” that examines the potential for increased use of E85 by examining recent data on fuel prices and E85 sales, particularly in Minnesota.

Anecdotal reports suggest that U.S. consumers are responding to competitively priced E85. In looking at Minnesota data, they noted that since sales volumes vary considerably, a simple average of station-level prices will result in a different average price than taking a sales volume weighted average. The simple average from January through August is $3.07 per gallon of E85, while an average price weighted by volume is $2.84. When E85 prices decline, falling below energy equivalence, sales volumes increase substantially. At one large retail location charted in the analysis, the relative price of E85 was relatively stable at about 85 to 90 percent of E10 and sales volumes hovered around 15,000 gallons per month. When the relative price of E85 decline, the sales volumes increased dramatically to between 30,000 and 50,00 gallons per month.

“Individual retailers that have reduced the relative price of E85 to below energy equivalence with E10 have seen sales volumes increase substantially,” the analysis concluded. “Yet, recent total sales volumes of E85 in Minnesota are only modestly higher than in early 2012 in Minnesota, despite a significantly more favorable price ratio based on data through July.”