Oil Prices Impact Ethanol and Corn Prices

July 25, 2011 05:00 AM

At crude oil prices of $100 per barrel, E10 ethanol can support a $7.75/bu. corn prices based on the energy value of corn, says Iowa State University economist Bruce Babcock. At $120 barrel crude, the corn price E10 ethanol can support based on the grain’s energy value rises to $9.75.

However, if crude oil drops to $60/barrel, corn’s energy value for E10 ethanol drops to $3.75, Babcock said at a "Recognizing Risks in Global Agriculture" meeting last week in Kansas City. The meeting was sponsored by the Federal Reserve Bank of Kansas City.

"Congress is trying to decide the future of biofuels," Babcock says. This includes both whether to continue the ethanol mandate as well as tax credits. "Elimination of the tax credit would drop production (of ethanol) a little bit, the price of corn a little bit," he says.

In studying the elimination of the ethanol tax credit across an average of 500 crude oil prices and corn yields, Babcock’s study concludes that U.S. ethanol production would decrease 4.7% and corn prices decrease 9.4%. Doing the same on the elimination of the ethanol mandate, U.S. ethanol production decreases to 10.9 billion gallons and corn prices decrease to $5.30/bu., Babcock says.

"If market demand is high enough, the mandate has no impact on production, price, or consumption of fuels. But if demand is not high enough, then there is a gap between production costs and the market value of biofuels," he states.

"Will we see crude oil prices of $60/barrel, $100, $160, the answer is yes," says Robert McNally, president of the Rapidan Group LLC, adding that there will be much oil price volatility in the years ahead.

"Corn ethanol’s political power in Washington has peaked," he says. That has not yet been factored into projections, he adds. "Ethanol fortunes have fallen fast and hard in Washington. The change was completely unexpected." The speed this occurred has been startling, he continues. As a result, corn growers could see changes in the Renewable Fuels Standard (RFS).

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Spell Check

7/25/2011 05:55 AM

  Well putting this article together with the preceeding one by the KC Fed Chief. We should expect crude oil prices to be $100, fuel prices to be $3.70-$4.00 and corn at $9.00. Oh yes and inflation. But I always thought rising prices without much reason to be inflation. I would also agree that there won't be a lifting of the enthano support, why?, because there is a impact to the demand if it is removed now. When there is no predicted impact then it's gone.


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