Farm Industry News Blog

Cheaper corn improves ethanol’s profit margins, but unlikely to impact sales of E15

Agricultural economists address the impact of lower corn prices on ethanol margins.

Due to the record corn harvest, corn prices have fallen to the $4.20 per bushel mark which has improved profit margins for ethanol producers and spurred some closed plants to come back online. Reuters reported this week, for example, that Cargill is opening a plant in Fort Dodge, IA that it had purchased from Tate & Lyle in 2011. The plant had been idled. Reuters also reported that Noble Group Ltd. is expecting to restart a plant in Indiana. Another facility in Ohio also came back online in October.

When times are good, the ethanol industry has historically expanded production which increases both corn and ethanol supplies, says Bruce Babcock, agricultural economist, Iowa State University. This can lead to market fluctuations that can actually reduce margins, he adds.

Asked about how current ethanol margins could impact the consumption of E15, Babcock said that future sales of E15 as well as E85 would likely be determined more by whether the EPA cuts the 2014 volume requirements for ethanol blends. On October 30, Reuters also had reported on a leaked EPA proposal that would significantly reduce ethanol blending volumes. If volume requirements are reduced, petroleum refiners would feel no pressure to blend beyond the E10 level, and ethanol producers would then export higher blends, Babcock says. Wally Tyner, agricultural economist, Purdue University, adds, “Prospects are not that great for expansion of E15 because it is dependent on retail stations, of which there are very few.  There is more potential for expanding E85 since ethanol is now about 75 cents per gallon less than wholesale gasoline.”

Retail prices for regular unleaded gas, however, are also lower and are expected to remain so for the rest of the calendar year. “I expect regular gas to range between $3 and $3.40 in this region for the rest of the year,” says Purdue’s Tyner. “That does not include non-attainment cities like Chicago.”

Tyner adds, “Prices will remain volatile as refineries are holding lower inventories, and when there is a maintenance issue, there will be spikes. However, both crude and gasoline inventories are higher than normal (the new normal), so that should put some downward pressure on pump prices.”

  

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