High crude, shifting trade patterns brighten ethanol prospects

By Susanne Retka Schill | June 19, 2014

An extended period of higher crude oil and gasoline prices and low corn prices could result in surprisingly large amount of corn used for ethanol production, conclude University of Illinois economists Darrel Good and Scott Irwin in a recent analysis posted on FarmDocDaily.

The economists note the recent decline in U.S. ethanol imports and expansion in exports starting last fall. “Imports and exports were evenly balanced in September 2013, but net exports were 25 million gallons in October 2013 and averaged nearly 60 million gallons per month from November 2013 through April 2014,” they report. Brazil led in U.S. ethanol purchases, with smaller increases in imports by India, the Philippines, the United Arab Emirates and South Korea.

Monthly U.S. trade data will be monitored closely to see if the favorable trade balance will continue. “The recent run-up in crude oil and wholesale gasoline prices and the decline in wholesale ethanol prices have made ethanol attractively priced as an octane enhancer and as a substitute for other gasoline feedstocks.  A continuation of that favorable price relationship would be expected to increase both world consumption of ethanol and exports of U.S. ethanol,” the analysis says.

Domestically, there is a growing opportunity for domestic ethanol consumption to expand beyond mandated consumption levels, they continue. “Positive blending margins should incentivize the expansion of consumption of higher blends of ethanol, both E15 and E85.  The pace of expansion will be determined by expectations for the duration of favorable blending margins and the speed at which the deployment of infrastructure can be put in place. The duration of higher crude oil prices will be influenced by the extent and duration of production interruptions in the Middle East.”

These market factors may push ethanol production levels to their highest ever, and with it, corn use. “It is premature at this point to project a continuation of the sharp increase in U.S. ethanol production currently being experienced and a substantial increase in corn consumption, but the economic incentives now in place certainly suggest careful monitoring of the situation.”