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By Robert Rapier on Jul 13, 2012 with 15 responses

Poor Corn Crop Will Have Major Impact on Ethanol Market

Our brand new weekly newsletter — Energy Trends Insider — debuted this week. We had stories on the implications of the U.S. corn crop, the state of Cleantech investing, Patriot Coal’s bankruptcy, and the potential of pyrolysis oil.

Interested readers can find more information on the newsletter and subscribe at Energy Trends Insider. To give a flavor for the kind of content, I want to share the story on the situation with the U.S. corn crop and how that can potentially impact upon the domestic ethanol sector. This has been a story that we have been on top of for two weeks; had ETI debuted a week earlier this would have been our lead story which was well before the story received much mainstream attention. In fact, I have not seen any detailed analysis yet on the potential implications of this story — but ethanol futures have moved sharply higher in the past two weeks.

Potential Impacts of Poor Corn Crop on Ethanol Market

By: Robert Rapier

I have long felt that one of the biggest threats to the U.S. ethanol industry is a major drought/crop failure in the heart of corn country. This year we may be experiencing such an event. Recent reports indicate that what had been expected to be a record crop of corn has been downgraded such that only 40% of the corn crop is being classified as in good or excellent condition. This is down 48% versus last week and 69% versus a year ago.

Corn prices are naturally surging in response; current corn prices are 21% higher than they were a year ago. Because so much of the corn crop is devoted to meeting ethanol mandates, there is a potential supply conflict being set up between food producers and ethanol producers.

This was always the risk in my mind; that a major drought could reduce the corn crop and result in surging fuel and food prices at the same time. This creates a situation that politicians who are not friendly to the ethanol industry will likely exploit. It won’t likely lead to an end to the mandates, but support for a 15% ethanol mandate (E15) — something the industry desperately wants — will likely erode in the face of the weak corn crop.

As you might expect, ethanol prices are moving higher, but I don’t think the price fully reflects the situation with the corn crop. It has been clear for at least two weeks that ethanol prices should move up in response, but the response has been slow and is just now gaining momentum. Normally, one would expect demand to fall in response to higher prices, and for that to mitigate the price rise, but gasoline blenders do not have the option of reducing their ethanol usage because of the mandate in place.

Thus, it appears that there is a short term opportunity in the ethanol market brought about by the corn shortfall. Longer term, there is a distinct risk for the growth of the industry as E85 prices become less competitive, and gasoline prices potentially rise because blenders are being forced to blend higher-priced ethanol. The MPG adjusted fuel price for E85 has now risen to above $4.00 a gallon, which is 50 cents higher than the price of midgrade gasoline.

The bottom line is that the short-term market for ethanol futures is bullish, but the longer-term market may become extremely bearish if politicians are successful in using the current situation to soften future support for ethanol.

(EDIT: As we go to press, the U.S. Dept. of Agriculture (USDA) confirmed this report by lowering their projected corn yield by 20 million bushels, a 12% reduction.)

  1. By Russ Finley on July 13, 2012 at 9:32 pm

    You would think that our politicians would have put in place an emergency clause that would temporarily let blenders off the hook in the event of something like this, on the other hand, if they are let off the hook, the ethanol industry would collapse.

    This supports the hypothesis that corn ethanol may actually increase fuel price instability over the long term.

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    • By Ed on July 14, 2012 at 10:47 am

      Our politicians now typically leave such discretion to the Secretary or the Administrator, rather than troubling themselves with detailed emergency clauses. They typically also legislate in such a way as to provide ample opportunity for lawyers and judges to become involved in interpreting the meaning of the legislation. Why some committee chairs even move legislation they have not read and would not understand if they had read it (John Conyers, D-MI regarding PPACA).

      My father taught me that “ignorance of the law is no excuse”. However, in this day of specialized courts and specialized lawyers, ignorance of the law (for ordinary citizens) appears to be unavoidable. IMHO, it is unconscionable for legislators.

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  2. By Tim on July 14, 2012 at 3:25 pm

    Corn supply scenario planning

    Good and Irwin
    University of IL

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  3. By Benjamin Cole on July 15, 2012 at 3:42 am

    There might, at one time, been reason to think about ethanol for the United States.  But with gluts to the moon of natural gas, really is ethanol a viable option anymore?

    An all-PHEV fleet powered by ethanol using high-compression ICEs makes some sense, but that is never going to happen.

    Meanwhile, cars can run easily on methanol, which is about $1.35 a gallon now. 

    The ethanol boondoggle continues….

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    • By Russ Finley on July 15, 2012 at 10:53 am

      …methanol, which is about $1.35 a gallon now.

      Keep in mind supply and demand. Radically increase demand relative to supply = increase in price. If corn ethanol remains significantly more expensive than its competitors on average, the mandates will have only hurt consumers (the economy) in the long run. Change is the only constant. You can’t predict the future. Mandated use was based on (increasingly obsolete) predictions (cellulosic, natural gas and oil prices, crop yields) and can’t respond to change. Basic Econ 101.

       

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      • By Russ Finley on July 15, 2012 at 11:06 am

        Add reduced gasoline consumption and hitting the blend wall early to the list of obsolete predictions.

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  4. By larryhagedon on July 15, 2012 at 11:56 am

    I live in the heart of Iowa Corn country. The author is correct, in that the great threat to corn supply is a big drought. He is also correct, that it could happen this year.

    More likely tho, is a few localy severe losses, with the vast majority of US corn fields making a fair to good crop. These worst case predictions make headlines, but historicaly sldom happen in real life.

    I just drove from soutern Iowa to mid Minnesota, and no corn fields were dead and brown. Those  I drove by were not all that seriously affected by drought.  At most there was minor leaf curling in a few fields. Of course, we could still have widespread serious drought damage, or maybe not.

    I have not seen any fields all brown and dead, as in the accompanying photograph, I suspect that is a file photo, but if such damage does exist, those are opportunities for those ethanol plants that have added celulosic corn cob and stalk feedstock capacity.

    We will soon see a switch from ethanol to bio butanol, and as the author mentions, methanol is certainly also a  possiblity. In fact, I am now setting up my own backyard methanol distillary, using waste wood localy abundant.

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  5. By JonSCKs on July 16, 2012 at 12:14 am

    Robert, you noted that a poor corn crop will have a “major impact” on the ethanol market. 

    What impact do you believe.. if any.. will this poor crop have on the entire energy complex given that ethanol production has been bouncing “around” 900 k bpd for the past couple of years?

    http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=W_EPOOXE_YOP_NUS_MBBLD&f=W

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    • By Robert Rapier on July 16, 2012 at 3:41 am

      Robert, you noted that a poor corn crop will have a “major impact” on the ethanol market. 

      Jon, actually that was Sam’s wording on the title. I had phrased it somewhat differently. But the impact I think it will have will primarily influence the future direction of the industry. I think it will make the headwinds against growing the industry from here much stronger.

      RR

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      • By JonSCKs on July 16, 2012 at 9:42 am

        Thanks for the reply. 

        We are trying to mitigate the drought’s effects.  On our farm we may actually have better yields this year than 2011.. the center of the drought has seemed to migrate further North East into the heart of the cornbelt.. centering over Missouri, Illinois and Indiana.. and we have received some beneficial rains here in Kansas.

        We need to enter a short crop with large stocks in order to sustain all demand.. However, the past couple of years have pushed useage to the wall..  Ethanol has been growing full bore.  Personally I believe 900 k bpd have made a huge contribution to our nation’s energy security.. Our country was BLESSED with large crops in 08,09,10 and even 2011.  No doubt etoh is not as important as other users of grain and will be treated as such this year.

        We had a large wheat crop here and the nearby feedlot is substituting more feed wheat vs corn.  Wheat is in a “surplus” situation with large acreage planted last year and even more planned for this coming year..  The local elevator took in the 3rd largest crop in the past 10 years.. so we have some room to help corn demand with wheat.  The elevator is full of grain but mostly wheat.

        As I noted our corn crop could be decent and usually in years past a shortage the nation will respond with a large crop for several reasons… price incentive, banked fertility, better weather, other crop acreage diverted to short crop production.. etc..  Also the government will allow haying and grazing of Conservation Reserve Program acreage.. there are still about 30 million acres in the CRP.. mostly here in the High Plains region.. many livestock will be turned out to pasture or feed baled CRP grass as well as other “non-traditional” feed sources..  Last year the neighbor baled about 15,000 acres of such alternative feed sources..  so there are many mechanisms to mitigate this drought’s effect.

        My fear is that ethanol gets shut down this coming year.. then we bust a Huge crop next year and swamp demand and prices plummet as shuttered ethanol plants may have difficulties restarting.  There are mechanisms to slow the production of ethanol.. the risks are that we need the co-product feed output to stretch limited feed grain supplies.  Wet DDGs’s (an ethanol by-product) will allow cattle feeders to utilize marginal feeds such as baled CRP grasses and crop residues. 

        We are now at levels which will draw imports of grain into this country from other surplus suppliers such as Brazil.. this may only last for a few months as producers plan for and make preparations to plant very large acreages for a 2013 crop.

        We diverted a lot of failed corn acres back to wheat last year to generate cash flow.. some of these fields produced quite well..  I suspect we will see that in parts of this years failed corn areas.

        Again I would like a clearer picture of the outlook that a reduction from 900 k bpd of etoh would have on the energy markets?  I wonder what the price impacts to the rest of the energy complex would be should ethanol production see a substantial cut.  If etoh is cut by 25% or more.. will we not see consumers pay more at the pump for regular gasoline.. doesn’t the shortfall have to be made up somehow..??

        Basically I do not agree with those who say that ethanol has NOT helped to lower consumer costs of energy.. this event will prove one way or the other of ethanol’s contribution to lower energy prices.  Currently I am paying $.12 cheaper for e-10 than regular unleaded.

        If I am wrong.. this drought will have no effect at the pump…  your thoughts.

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        • By Tim on July 16, 2012 at 1:40 pm

          12 cents cheaper is about right, based on current prices and reduced BTU’s in E10. There is no free lunch. 

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        • By Robert Rapier on July 16, 2012 at 7:08 pm

          My fear is that ethanol gets shut down this coming year

          The RFS will not be overturned. The cellulosic portion may be modified, but I think that’s as far as it goes.

          If etoh is cut by 25% or more.. will we not see consumers pay more at the pump for regular gasoline.. doesn’t the shortfall have to be made up somehow..??

          In the short term, prices will rise. They will rise due to the shortfall, but also because ethanol prices themselves will rise. In the longer term, it just depends on the world’s ability to make up for the lost supply. We have already adjusted to the loss of Iranian oil, so it is quite possible that given time the world could absorb that loss without too much problem. 

          Another possibility, though, is that loss of ethanol would free up a lot of natural gas that could then go into fueling vehicles. I don’t advocate for eliminating the RFS, and would not be for killing off our ethanol production, but the impacts of that on the fuel supply may be less than you think. On the other hand, it would devastate the Midwestern economy.

          RR

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  6. By Lewis C on July 17, 2012 at 3:19 pm

    Can anyone give a well backed figure for just what fraction of the US ethanol production would need to be suspended due to drought-hit corn supplies for the global all-liquids fuel market to lose a problematic fraction of the cushion between supply & demand ?

    Or is US corn ethanol just not on that scale as a percentage of global liquids supply ?

    Regards,

    Lewis

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  7. By Robert Rapier on July 17, 2012 at 3:23 pm

    Or is US corn ethanol just not on that scale as a percentage of global liquids supply ?

    It is far less than the loss of oil production from sanctions on Iran. So in the global scheme, it really isn’t that much.

    But I don’t see them suspending any production. Producers will fight tooth and nail to avoid setting that precedent.

    RR

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    • By LewisC on July 17, 2012 at 9:47 pm

      Robert – my thanks for your swift and well-informed reply. It’s something I’d meant to check up on for quite a while, as one possible reason for Obama’s notably immoral action in expanding the fraction of the US grain harvest diverted from global food and feed sales to fuel-makers.

      As you’ll know, corn ethanol is somewhat worse than irrelevant to the goal of reducing carbon emissions – and even if it were very effective on that score, then like practically every other renewable it would be of no real significance since any fossil fuel locally displaced is simply bought and burned elsewhere. Obama’s decision was thus nothing to do with climate.

      That it might be to do with pumping up the global all liquids supply-demand cushion to postpone the next global oil price-spike was the one reason that at least offered a geo-economic justification for Obama’s decision. And you’ve just dispatched that as a possibility.

      That Obama would boost the ethanol mandate to put the welfare of corn-belt industrial farms ahead of the suffering of additional millions abroad from the resulting rise in global food prices seems possible, but really pretty unlikely. At the time of the decision the voters of the corn belt who actually do the work faced severe problems (then as now) with the degree of farm debt to finance houses and onerous contracts with absentee corporate landlords, who between them of course take all and more than the lion’s share of any additional profit from raised grain prices – I.e. raised grain prices due to the ethanol mandate have made little if any difference to the prosperity of the average voters across the corn belt.

      If this is correct then the mandate was not expanded primarily in hopes of electoral gain for democrat candidates. On the contrary, lower grain prices and additional forced farm sales due to the evident predations of corporate agribusiness and finance houses might well be expected to do more to boost the democratic vote.

      Which leaves a fourth possible motivation that is, as yet, without a cogent critique. This relates to climate destabilization and two bits of ‘received wisdom’ about it, and to the maintenance of US global economic dominance, which I guess we’d agree has been the primary concern of every administration since WW2.

      The ‘received wisdoms’ – which have long been widely held across Washington – are these:

      1/. – that developing southern countries such as China and India are going to be much harder hit by climate destabilization than are developed northern countries like the USA and the European nations;

      2/. – that American society could withstand rising food prices resulting from intensified climate impacts globally and consequent crop failures far better than could major developing countries due to its vast food production and its peoples’ spending power.

      On present trends the Chinese economy is reportedly due to exceed that of the US during 2018, which begs the question, just what is the US establishment doing about it ? There’s no military build-up as led Russia into a ruinous arms race – and China has made very clear that it won’t enter such a contest – What has actually happened is that the US has operated a bipartisan policy of a ‘brinkmanship of inaction’ on climate, which requires no spending or deployments but leaves China facing a rising threat of the climatic destabilization of its government, as crop-failures and food-price inflation push its people towards eventual protest and revolt.

      At the point where the Beijing regime fell, so too would fall China’s bid to usurp America’s global economic dominance, in the chaos and instability of trying to establish a new social order while dumping the exceptional effectiveness of a state-run capitalism.

      If this were the policy that Obama adopted from Bush and Cheyney, when he copied Bush in reneging on America’s signature of the UNFCCC mandate just a few weeks after taking power, then the motivation for expanding the ethanol mandate is readily explicable. Doing so would, entirely predictably, compound the rise of global food prices due to rising demand meeting climate and other hindrances of supply growth, and would thereby bring matters to a head much sooner than merely leaving climate destabilization to run its course. This would limit both the final scale of China’s economic challenge and the degree of global warming to be endured, with the sulphate geoengineering option (as proposed in ’96 by one Edward Teller) held in reserve as an off-switch for that warming once it became convenient.

      Personally I find both of the basic assumptions behind this inadmissible foreign policy to be nearer assertions than serious predictions. In terms of spending power in the West, in the UK  (pop.n ~60m) it was recently announced that we’ve over a million children going hungry – to the extent of being clinically malnourished – so God knows what the numbers are in the US – but few things will make decent people angrier than being deprived of affordable food for their children – and I’d not fancy being in amongst well armed food riots in either country.

      Similarly the notion of northern nations getting a lighter hit from climate destabilization, which always lacked scientific credibility, is now looking pretty threadbare. The fact of the destabilization of the jet stream’s conduct, with its effortless capacity to impose weird blocks on major weather systems’ movement and so deliver both prolonged extremes of drought/storm/heat/flood/cold and rapid flips from one to another, has now been candidly acknowledged in public by senior scientists. The destabilization of the global El Nino cycle is similarly described as being wholly predictable as a further aspect of the ongoing global climate destabilization.  And beneath these massive climate dynamics northern nations have an irreplaceable value of built infrastructure and vulnerable farmlands and increasingly alienated populations. What we don’t have, and show little sign of recovering in the coming years, are economic growth rates to justify investment in the reconstruction to status-quo-ante of climate impact sites.  – New Orleans’ rotting suburbs are perhaps one early (and disputed)  example of this dynamic.

      In short, Obama’s unforced decision to expand the ethanol mandate can be explained by a direct strategic interest in escalating global food prices, with the goal of advancing the eventual climatic destabilization of China.  With Bill Clinton declaring (against protocol) that the mandate must be reversed as a matter of common humanity, it seems the blackest of ironies that the strategy the mandate supports is founded on such weak and wishful expectations of relative US advantages under a climate going haywire.

      Robert, I should much appreciate your thoughts on the four possible motivations described above, and indeed on other possibilities that may be visible to you.  My interest in that motivation is not in proposing it as any proof of the brinkmanship policy – which stands on other diverse evidence – but in discerning whether it might be unrelated to that policy and thus be more readily rescinded, as its impact abroad is getting really horrific.

      With my apologies for length,

      regards,

      Lewis

       

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