After a hard year, production and use could catch fire in the second half 2013
Year after year of upward ethanol production came to an end in 2012. In the last four months of the year, output fell 11% in light of sky-high corn prices and tumbling ethanol prices.
"Capacity is running about 86%, and 32 plants are shut down," says Bob Dinneen, president and CEO of the Renewable Fuels Association. "It’s a difficult time for the industry, but it’s not as bad as 1995-96 when 20% of the industry was shut down."
He believes that overall 2013 will be better than 2012, and 2014 better still. His optimism stems from the fact that the Renewable Fuels Standard (RFS) increases from 13.2 billion gallons in 2012 to 13.8 billion this year to more than 14 billion in 2014.
Fuel ethanol output fell from an average of 900,000 barrels per day in early 2012 to 820,000 barrels per day the second half of the year. Ethanol production will remain at those levels through mid-2013 before recovering to pre-drought production levels, according to projections by the Energy Information Administration (EIA).
Looking to 2014, the EIA forecasts production to reach 915,000 barrels per day. That’s 14 billion gallons for the year, up from the 13.3 billion estimate for 2013. If this happens, the ethanol share of the gasoline pool increases from an average of 9.6% in 2012 to almost 11% by the end of 2014.
If the 14 billion gallon figure is reached in 2014, it will create demand for 5.2 billion bushels of corn next year, an additional 300 million bushels than EIA projects for use in 2013.
Corn acres needed. "The corn crop in 2013 is the single biggest factor (for that to occur)," says Todd Becker, president and CEO of Green Plains Renewable Energy, the nation’s fourth-largest ethanol producer. If the corn crop is off and running this summer, he sees production reigniting.
"The industry needs sub-$5 corn," he says. "I’ve made money with $7 corn and with $5 corn."
The rub this time around is that ethanol prices are much lower, which combined with record corn prices, puts the squeeze on plant margins.
With some plants scaling back or even halting production for a time, is there a risk for producers who lock in contracts with ethanol plants? Not any more than selling to any other processor, says David Ripplinger, economist at North Dakota State University.
"Counter-party risk is always there," he says. "It’s Marketing 101." He has not heard any cases of farmers with ethanol corn contracts not getting paid.
In for the long haul. What amazes Ripplinger the most is not that production is down 11%, but that it is as high as it is—which speaks to the staying power of the industry.
Help might be on the way for ethanol producers. If average corn yields are 160 bu. per acre for the 2013 crop, the cost of producing ethanol drops a substantial 80¢ per gallon, from $2.40 to $1.60, assuming corn prices of $5 per bushel, according to Bruce Babcock, economist at Iowa State University.
In his view, the ability to consume more ethanol in the U.S. is "severely constrained" by the E-10 blend wall, however. Approximately 135 billion gallons of finished motor gasoline is expected to be consumed in 2013, which means that if ethanol blends are limited to 10%, the maximum contribution from ethanol is about 13.5 billion gallons. The blend wall will make it difficult to meet the 2014 mandate, which might pressure the Environmental Protection Agency (EPA) to lower it.
- Mid February 2013