Recent corn price weakness has a lot to do with both supply and demand considerations, a University of Illinois ag economist suggests.
Darrel Good says on the supply side, expectations of stronger yields in many areas suggest that the next USDA average yield forecast will be at least equal and perhaps exceed the September forecast.
While uncertainty about how much harvested acreage will not be cleared up until the next USDA crop report lingers, Good says it appears that production will be large enough to result in a sizable buildup in stocks by the end of the current marketing year.
Ethanol rumors key demand player
On the demand side, he says, the partial government shutdown has constricted livestock, grain and ethanol information, leaving only news of the leaked EPA report that suggests a reduction in Renewable Fuel Standard volume obligations.
The rumored drop – about three billion gallons – was not anticipated for many, and the reduction in the non-advanced component of the mandate from 14.4 to 13 billion gallons has been interpreted as a negative development for corn demand in 2014 and beyond, he says.
Even so, the EPA says the proposed changes have not been finalized, and the public has not commented, so the final rules could easily change. However, he says analyzing the potential impact on corn demand of a reduction in the implied mandate for renewable biofuels is useful.
For starters, domestic ethanol production has been relatively constant for the past four years, totaling 13.3 billion gallons in 2010, 13.9 billion in 2011, and 13.3 billion gallons in 2012, and production in 2013 will be within the range of the past three years, he says.
"Ethanol production in 2014 will be influenced by a combination of the magnitude of the RFS mandate, the magnitude of the domestic blend wall for ethanol, the extent of the use of RINs credits to meet the RFS mandate, the net trade balance for ethanol, and the magnitude of discretionary blending of ethanol, if any," he said.
With some expansion in E85 consumption, it appears that the domestic blend wall is expanding slowly and may be as large as 13.2 billion gallons in 2014.
"An RFS mandate at or below that level could then be met by physical blending in 2014 and would not require the use of RINs credits. Given policy uncertainties in the future, parties might choose to hold onto RINs and meet the RFS with physical blending, particularly if RINs prices continue to decline," Good says.
The economist notes that depending on the final magnitude of the RFS mandates in 2014, discretionary ethanol blending would likely have to be in the form of higher blends, most likely E85 in the immediate future.
"The ability to expand E85 consumption would be influenced by blending economics of E85 and the rate of increase in infrastructure required for deploying E85. If the final rules resemble the leaked rules, ethanol RINs prices will be very low, and blending economics for E85 will be determined primarily by the retail price of E10 and the price of ethanol," he said.
Good adds that the price of ethanol is primarily determined by the price of corn.
For example, the current price of E10 near $3.30 would require corn prices near $3.70 to make E85 competitive at the pump on an energy equivalent basis. Persistently low corn prices then could motivate an expansion in E85 infrastructure and discretionary blending of ethanol, he says.
Finally, the trade balance for U.S. ethanol will be influenced by the RFS mandate for biodiesel and for total advanced biofuels and the relative economics of meeting the total mandate with Brazilian sugar cane and biodiesel.
"If the total advanced mandate is only marginally higher than the biodiesel mandate as rumored, imports of Brazilian ethanol would not likely increase from the relatively low level of this year and the U.S would maintain a positive ethanol trade balance," he notes.
"The size of those imports is important because imported ethanol crowds out domestic ethanol under a blend wall scenario," Good says.
A possible reduction in the RFS mandate for renewable biofuels has generally been interpreted as a negative development for corn demand, Good asserts. However, a broader consideration of the potential impacts suggest that corn demand and therefore prices in 2014 might be largely unaffected by a reduction.
Source: University of Illinois