Has ethanol lost its license to drive the corn market?
Blogger Stu Ellis, at FarmGateBlog.com, offers an interesting perspective on the lastest swings in ethanol economics.
In the initial depths of the recession, agriculture was performing well, thanks to the demand for grain, and in particular for corn because of the demand for ethanol. The ethanol mandate was creating demand for corn and prices kept rising, pushing commodity markets to new highs nearly every month. Ah, those were the good old days. Now the bloom is off the rose. Gasoline demand is down, the blend wall is pushing ethanol demand down, and corn prices are not as strong as they once were. Was Little Orphan Annie correct in assuming “The sun will come out tomorrow?”
When the Congress approved the Renewable Fuel Standard, conventional wisdom said by this time we would be consuming 150 billion gallons of motor fuel annually and a 10 percent ethanol blend would necessitate 15 billion gallons of ethanol, which would require nearly 5 billion bushels of corn. But the recession dampened the upward demand curve, and now the current thinking is the need for only 13.4 billion gallons of ethanol to meet the demand. That has reduced the demand for corn and batted back the price from the nearly $8 high. The goal of 15 billion gallons of corn-based ethanol may be a footnote in an economic history book.
Ellis argues that the blend wall, which is the ceiling for ethanol demand, could be raised with the use of E-15 or E-85, but there are problems, mostly related to the lack of pumps at service stations and the reluctance of the auto industry to warrant the use of higher ethanol blends. He says EPA approval of E-15 may have little impact if distribution is non-existent. Ellis then makes the case that biobutanol, an advanced biofuel that can be made at ethanol plants with some modification, has the potential to replace gasoline without a limiting percentage blend.