Economists evaluate impact of gas prices on ethanol, corn demand

By Erin Voegele | December 08, 2014

University of Illinois economists Scott Irwin and Darrel Good recently addressed the potential impact of falling gas prices on ethanol and corn demand in a Dec. 4 FarmDocDaily post, theorizing that the risk of adverse impacts has been over-stated.

Within the post, Irwin and Good explain that, historically, it has been relatively rare for ethanol prices to exceed CBOB prices in the wholesale market in Chicago and those occurrences were generally short-lived. The longest period that this occurred was in late 2008 and early 2009, when crude prices declined sharply under recessionary pressures. The economists also explained that they have argued the breakeven prices of blending ethanol at 10 percent is 1.0 or 1.1 times the price of CBOB. Since 2008-’09, the price ratio has rarely exceeded 1.1, and then only for short periods of time. According to the post, however, the ratio increased above 1.1 in November, reaching its highest level since early 2009. “It is that price spike and the potential for the ethanol price premium to continue for a more extended period that has generated concerns about ethanol and therefore corn demand,” wrote Irwin and Good.

In the post, the economists cite the renewable fuel standard (RFS) as the chief factor that must be considered when assessing the potential impact of the higher ethanol and CBOB pricing ratio. According to Irwin and Good, there are growing indications that the U.S. EPA may revise its proposed mandate for ethanol closer to the statutory levels.

“If we are right that EPA rulemaking for 2014 and beyond will be at statutory levels, then the question of exactly how the mandates will be achieved becomes very important,” they wrote, noting that if their predictions are correct, expected levels of required renewable fuels blending will be met for the time being with a combination of physical blending of ethanol and biodiesel. This is because holders of “excess” renewable identification numbers (RINs) stocks are not expected to retire large quantities in the near-term since it is possible future mandates will exceed the size of the E10 blend wall.

While biodiesel blending is favorable on economic terms right now, Irwin and Good indicate ethanol will mostly likely be used to meet the renewable biofuels mandate, at least to the extent of the E10 blend wall, which is currently approximately 13.5 billion gallons. Even without relatively low CBOB prices, the economists point out that there have been difficulties in expanding the use of higher ethanol blends, such as E15 and E85. “The bottom line is that domestic ethanol consumption is likely stuck around 13.5 billion gallons regardless of the price of ethanol relative to CBOB,” they wrote.

Irwin and Good also address the impact of the price ratio on exports, noting that it could result in a decline. They also specify, however, that Canada accounted for 45 percent of exports over the first nine months of the year. Since consumption is also mandated there, the economists predict exports to Canada will not be adversely affected.

 “Overall, we see little risk of total ethanol use falling below 13.9 billion gallons, and consequently, corn use for ethanol of less than 5 billion bushels. In addition, market history suggests the ethanol/CBOB price ratio is not likely to move above 1.0 for a long period of time and that market adjustments to maintain the competitive position of ethanol are likely to be rapid. This adjustment process has already started with fairly sharp declines in ethanol prices in recent days,” Irwin and Good concluded.

A full copy of the post is available on the FarmDocDaily website