Strong Corn Crop Brings Ethanol Demand In Focus

Analysts have a look at what corn prices ethanol margins are up to this winter

Published on: Dec 16, 2013

Near-record corn yields coupled with low corn prices this year may start to look pretty appealing for ethanol producers, export markets and biofuels consumers, analysts expect.

It all starts with the rebound in corn yields farmers experienced this year after a rough 2012.

Irene Olson and Sean Hill, analysts for the Energy Information Association, explained in a Friday EIA brief that higher corn yields coupled with memories of the 2012 drought have left the ethanol producers looking at significantly improved margins.

"Between October 2012 and January 2013, the ethanol margin for producers was close to zero. The recent reduction in corn prices had a major impact on the profitability of ethanol production, because purchased corn is by far the largest cost incurred by ethanol producers," they explained.

Analysts have a look at what corn prices, corn production and ethanol volumes are up to this winter
Analysts have a look at what corn prices, corn production and ethanol volumes are up to this winter

But between January and November, 2013, corn prices fell from $7.50 per bushel to below $4.50. That $3 reduction translates to $1.08 reduction in the cost of ethanol production, Olson and Hill said. And, while ethanol prices have also declined, ethanol producer margins have risen above $0.50 per gallon in recent months.

Improved margins have incentivized greater levels of ethanol production, with output recovering to pre-drought levels. At the same time, lower prices have made ethanol more economically attractive for refinery blending, and output of ethanol-blended gasoline has risen. Net use of ethanol by refiners and blenders reached an all-time high of 884,000 barrels per day in August 2013.

Strong Corn Crop Brings Ethanol Demand In Focus

EIA graphic

Corn demand

All the talk about recovering ethanol margins may actually be good news for corn farmers, as it has the potential to drive up demand, says Chris Hurt, Purdue Extension agricultural economist.

Even EPA's November proposal to reduce the amount of biofuels blended into gasoline and diesel may not be as bad as once thought, he says.

The plan, which proposes a reduction in renewables blending from 18.15 billion gallons to 15.21 billion gallons in 2014, even if approved, may not drop corn use for ethanol below the 4.9 billion bushels that the USDA has estimated, Hurt says.