Economists examine recent trends in ethanol production, policy

By Susanne Retka Schill | March 03, 2015

A decline in ethanol prices has accompanied the decline in gasoline prices, yet ethanol production has been at record levels for much of the current corn marketing year, biofuels economist Robert Wisner noted in an analysis in the February issue of the Renewable Energy Newsletter of the AgMarketing Resource Center.

While ethanol production dipped in January, it is still higher than the previous year of record production, 2011-’12. If the projections made by USDA in the Feb. 12 supply/demand report are attained, Wisner noted, corn use for ethanol and distillers dried grains with solubles (DDGS )production will total 5.25 billion bushels, an increase of 2.3 percent from the previous corn marketing year and 13.1 percent higher than two years ago.

Returns per gallon for ethanol and distillers grains over direct costs have dropped dramatically since the peak that briefly hit $2 in April 2014, and declined throughout the year. Returns spiked again to about $1 per gallon in December, before dropping to zero in recent weeks. The direct costs are based on spot markets, Wisner added, and may vary significantly from actual returns impacted by hedges and forward contracts on purchases and sales. Currently, higher-than-normal distillers grains prices have helped support returns for ethanol production during this period of low gasoline and ethanol prices. Producers are also aided by returns from corn oil sales that were not included in the accompanying chart.

Wisner analyzed other factors influencing ethanol production, including mandated blending rates and ethanol’s octane value. “The 2015 mandate for corn starch ethanol is expected to be set somewhere between 13.6 and 15.0 billion gallons. The upper end of the range is the level required by [the Energy Independence and Security Act] for 2015. The lower level would be approximately a 10 percent blend of ethanol in the nation’s gasoline supply. A mandate at the high end of the range would create an incentive to promote E15 to increase the size of the ethanol market. The lower end of the range plus 700 million gallons of ethanol exports would meet USDA’s projected 2014-’15 corn use for ethanol and DGS production.” 

Wisner cited a study by the U.S. DOE on the economics of octane boosters in gasoline. “The DOE demand curve indicated reductions in ethanol blending for 2012 and 2013 would begin if ethanol prices exceed gasoline by more than 10 percent.  At ethanol prices 50 percent above gasoline, substantial demand for ethanol was still indicated.” At ethanol prices above gasoline, Wisner added, reductions were expected to occur sooner for splash blending than when octane is increased at petroleum refineries.

Conditions supporting U.S. ethanol exports are looking favorable. “Brazil is the major influence on U.S. exports,” Wisner wrote. “Its 2014 sugar crop was adversely affected by dry weather and is limiting its ethanol production to some extent.  Also, the Brazilian government increased its mandated minimum ethanol blend in gasoline from 20 to 25 percent last year and is increasing it to 27 percent this spring. These conditions suggest Brazil’s ethanol exports will be restrained in the next few months. That in turn should help support U.S. ethanol exports. Also, one of the largest ethanol plants in EU, a U.K. plant, is being shut down due to adverse economics.”

As for the gasoline markets, Wisner said one indicator to watch is gasoline inventory. “Gasoline inventories are at the highest level in several years and were still trending upward in mid-February. Large inventories tend to put pressure on prices at some point unless the upward trend is halted. Ethanol inventories also have increased. However, unlike gasoline, they remain below the highs of previous years.”

Earlier, University of Illinois economists Scott Irwin and Darrel Good examined the implications of U.S. EPA implementing the renewable fuel standard’s volumes at statutory levels. Two substantial gaps will be created, they said. “The first is the renewable gap, the result of renewable (ethanol) mandates being set above the E10 blend wall. The second is the advanced gap, which we define as the amount advanced mandates exceed a biodiesel mandate of 1.28 billion gallons and a small amount of other domestic and non-U.S. advanced ethanol. We estimate that the sum of these two gaps is slightly less than 2 billion gallons in 2015, grows to nearly 3 billion gallons by 2017, and then tops out at about 4.5 billion gallons in 2022.” The gaps would first be filled by RINs credits (unused renewable identification numbers), the economists suggested, most likely followed by greater utilization of biodiesel, tapping into underutilized capacity from both domestic and foreign producers.

Good and Irwin conclude, “There are no easy solutions to meeting the RFS mandates at statutory levels, particularly in the short-run, even after writing down the cellulosic mandates close to zero and all solutions will be costly in terms of producing and blending biofuels. There may well be offsetting social benefits in terms of greenhouse gas emissions and energy security but those benefits have to be weighed against the additional transportation fuel costs. The intense political battle over the fate of the RFS is unlikely to abate anytime soon.”