Without Ethanol Subsidy, Corn Stocks-to-Use Increase

June 27, 2011 10:27 AM

If the ethanol subsidy is eliminated as some in Congress are calling for, corn stocks-to-use could increase, potentially putting modest pressure on corn prices.

“The elimination of the blender’s credit could put discretionary blending at risk, and in a worst-case scenario would add 220 million bushels of corn back into inventory, driving stocks-to-use up from the current estimate of 5.2% to 6.9%,” says Ann Duignan, managing director, J.P. Morgan Equity Research. “This stocks-to-use ratio would be far from ‘burdensome,’” though, she says.
“Our analysis suggests that lifting the subsidies would do little to change ethanol industry fundamentals.”
“Ethanol producers are making money.” According to Duignan, at current prices of ethanol, corn, natural gas and DDGS, ethanol producers’ gross margins are 5.5%, down from a peak of 24.7% at the end of November 2009, but up her last ethanol review of 4.3% in March 2011. Margins have increased with flat corn prices, ethanol prices up 2%, DDGS up 5% and natural gas up 13% since early March, Duignan states.
As gasoline prices rise, the blenders’ spread widens, she continues. Spot ethanol (including freight costs) is currently trading at 14 cents per gallon below wholesale rack gasoline prices. Given that blenders receive a credit of 45 cents per gallon of ethanol blended, this implies that the blender is making about 59 cents per gallon of ethanol blended, or about $0.06 per gallon blended with 10% ethanol. This is a decline since March, when blenders were making up to 81 cents per gallon of ethanol blended (including the subsidy), she says.
At current prices, even without the tax subsidy, blenders make money. If the 45-cent tax credit were to expire on December 31 as planned, the incentive to continue discretionary blending still exists.
Imports from Brazil are not cost effective at this time.
Duignan notes that the U.S. Senate “symbolically” voted recently to eliminate the 45-cent-per gallon ethanol tax credit, which disproportionately affected agricultural machinery stocks. “We believe that the sell-off was overdone.”


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