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Ethanol Slowdown Ahead—New Demand Source Needed

February 20, 2012
By: Fran Howard, AgWeb.com Contributing Writer
POET ethanol plant
  
 
 

 

Corn demand from ethanol is expected to drop by 75 million bushels over the next two years, according to USDA’s recently released baseline for 2012-2021. A 75-million-bushel decrease equates to about the same amount of corn that either Arkansas or Louisiana produced in 2011.
 
To make up for that loss, some analysts think a new demand source is needed if prices are to remain in the current price range.
 
"Ethanol production has been slowing over the past few months," notes Chad Hart, agricultural economist with Iowa State University. According to the recent World Agricultural Supply and Demand Estimates (WASDE), corn demand for ethanol production is expected to drop by about 21 million bushels for the current marketing year, compared to the 2010-11 marketing year.
 
So how much of ethanol’s current and expected slowdown is due to the expiration of the Volumetric Ethanol Excise Tax Credit, also known as VEETC or the blender’s credit? Not much, says Hart.  "The ethanol industry is stabilizing. We aren’t building any new plants right now," he says. "And given that new plants are not being built, you wouldn’t expect demand to increase."
 
In its recently released baseline projections, USDA has corn demand for ethanol production falling from 5 billion bushels for the 2011-12 crop to 4.95 billion bushels for the 2012-13 crop and and 4.925 billion bushels for the 2013-14 crop. USDA expects demand for corn from ethanol plants to begin increasing after that, reaching 5.1 billion bushels by the end of the baseline period.
 
"Smaller gains for corn-based ethanol are projected over the next 10 years than have occurred in recent years," USDA says in its baseline commentary. USDA attributes weakening demand to overall declines in gasoline consumption in the United States, constraints in the E15 market, and the small size of the E85 market. "Nonetheless, a strong presence of ethanol in the sector continues, with about 36 percent of total corn use expected to go to ethanol production during the projection period," USDA states. For the 2011-12 crop, corn demand for ethanol is estimated to use just over 40 percent of the total U.S. corn crop.
 
Credits given to gasoline blenders who have blended more ethanol into their gasoline blends than required by the federal Renewable Fuel Standard have been building. "Each and every year, we’ve produced extra credits, which typically overhang the market in the early part of the year," says Hart. If gasoline demand declines enough to pressure gas prices substantially lower, Hart says the build in credits could really depress corn demand for ethanol.
 
"What should concern the ethanol industry is another recession," says Hart. "In 2008, fuel prices were low enough that blenders backed off and small ethanol plants had to shut down."
 
Some analysts worry that if U.S. corn yields return to trend-line levels near 175 bushels per acre another demand source will be needed with corn acreage continuing to climb in the United States and elsewhere in the world.
 
Hart agrees. "If you are trying to hang onto $6 per bushel corn, you do need a new demand source," he says. He predicts that average corn prices will move into the $4.00 to $4.50 per bushel price range over the next decade. USDA’s baseline puts average prices between $4.30 and $4.60 from now until 2022. For the decade beginning in 2000, the average cash corn price was $3.10 per bushel, but prices ranged between $1.97 and $5.40.

 


 

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RELATED TOPICS: Corn, Crops, Biofuels, Energy, Ethanol

 
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COMMENTS (3 Comments)

Sambo - MO
If one of the tractor companies would develop a fuel cell powered farm tractor, and combine, and mower-conditioner, etc. etc. then the ag community could use ethanol to power the machinery we use to raise our crops with the fuel we make. Electric motors have more torque that IC drive trains and it would provide a buffer should we ever run into another oil embargo. And, if natural gas stays low in price it can be used as fuel in the same rigs where it makes sense.
3:35 PM Feb 21st
 
Minnesota Farmer - Brownsdale, MN
75 million bushels equates to what percentage of total useage? if it were a hundred million we grow like1300 times that amountif my math works, so we are talking about an amount perhaps 1/1700 of what we grow. I will just watch for the next govt reoprt, they find or loose much more than that with the swipeof a pen. Haven't seen more than 3 tenths of an inch of precipitation at once since July, and it probably totals around 1.2 inches since that time. We better find something other than more demand base soon
6:21 PM Feb 20th
 
Minnesota Farmer - Brownsdale, MN
75 million bushels equates to what percentage of total useage? if it were a hundred million we grow like1300 times that amountif my math works, so we are talking about an amount perhaps 1/1700 of what we grow. I will just watch for the next govt reoprt, they find or loose much more than that with the swipeof a pen. Haven't seen more than 3 tenths of an inch of precipitation at once since July, and it probably totals around 1.2 inches since that time. We better find something other than more demand base soon
6:21 PM Feb 20th
 



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