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As Gas Prices Rise Ethanol Becomes More Attractive

March 1, 2011
By: Fran Howard, AgWeb.com Contributing Writer

Last week U.S. crude oil prices closed at their highest weekly settlement since September 2008 as unrest in the Middle East continued to fuel uncertainty about future oil production in the oil-rich region. Despite stabilizing prices since then, most analysts think crude oil prices will remain volatile on continued turmoil in the Middle East. That bodes well for ethanol producers and corn growers, at least in the short term.

“We have so much oil in this country right now stored in Oklahoma, and it’s trading at a $20 per barrel discount to Brent crude because of the risk premium in the Middle East and Chinese demand,” says Peter Georgeantones with Abbot Futures, Minneapolis. He expects crude oil prices to trade in a range of about $85/barrel to $115/barrel, barring any major supply disruptions.
 
Crude oil in Cushing, Okla., the delivery point for NYMEX futures, is nearing storage capacity of 46 million barrels, and while supply does not appear to be an immediate problem, gasoline prices have risen substantially over the past few weeks. Last week U.S. average gas prices, according to AAA, rose to levels not seen since 2008 to $3.29 per gallon.
 
As gasoline prices rise, so do potential profit margins for ethanol producers, at least for the short term. Return over operating costs for ethanol producers has been near 25 cents since the start of the year, a level that lets ethanol grinders pay capital costs, but which doesn’t allow for expansion, according to Bruce Babcock, director of the Center for Agricultural and Rural Development at Iowa State University.
 
Despite these so-so margins, ethanol producers have been making more ethanol than the federal mandate dictates spurred by the recent extension of the blenders tax credit through the end of 2011. “Blenders want to capture the subsidy, which equates to about $6 billion,” says Babcock. Demand for ethanol is strong enough that instead of being a limiting factor the mandate creates a floor.
 
This year the mandate calls for 12.6 billion gallons of ethanol, but blenders will likely produce 13.5 billion gallons, according to USDA. By 2015, they will need to produce 15 billion gallons.
 
Ethanol production could decline in 2012
Next year by mandate, blenders will need to produce 13 billion gallons of ethanol. “With bad weather, we won’t hit the mandate,” says Babcock. With a short crop, the cost of corn would become prohibitive for ethanol producers. If the U.S. Congress does not extend the blenders credit in 2012 and the U.S. corn crop is large, blenders will likely blend only to the level of the federal mandate.
 
The price of corn has become linked to the price of oil, Babcock notes, which means costs continue to rise for ethanol producers. That creates perpetually low to nonexistent profit margins—at least while the blenders credit is in place.
 
Because the blender credit increases the attractiveness of blending ethanol with gasoline, blenders bid up the price of ethanol as they compete for a limited supply, Babcock notes. “This keeps ethanol plants running at a high rate, but it also bids up the price of corn, so the margin stays low for ethanol producers,” he adds.

 

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RELATED TOPICS: Biofuels, Energy, Economy, Ethanol

 
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COMMENTS (1 Comments)

PullMyFinger - Chappell, NE
I haven't seen any ethanol-blend prices that are even close to attractive. As long as blended fuel sells for the same price or mere pennies less than non-blended, only a fool would buy it.
9:52 AM Mar 2nd
 



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