US ethanol production plunges to two-year low

Photo copyright: GraphicObsession. Silhouette of a Cornfield

Drop in output follows the worst drought in 55 years

13 August 2012

Production of fuel ethanol – produced from fermenting sugar or starch bearing crops such as corn – has dropped to around 800 thousand barrels per day (kb/d) in the US, the lowest level in two years, according to the International Energy Agency’s latest Oil Market Report (OMR).

This fall in the output of ethanol, which is blended with unleaded gasoline blend stock, follows the worst drought in 55 years in the US, which is severely affecting its key corn growing regions.

The continued absence of rain in combination with very low US corn stocks have driven up corn prices to record highs during the last weeks.

These high corn prices, in combination with falling ethanol prices (reflecting in part a combination of a weak economy and automobile efficiency improvements), have slashed ethanol producers profit margins. This has led to a number of ethanol plants reducing or temporarily halting production, which has in turn prompted the two year low in ethanol output.

“Given the current situation, we see US ethanol production at an average around 850 kb/d in 2012, 60 kb/d lower than in 2011”, noted the OMR.

Pressure on livestock producers

The drought, in combination with current low level of US corn stocks, have also raised prices of fodder for livestock, putting increasing economic pressure on meat and poultry producers.

Since around 40% of the US corn harvest is processed in ethanol distilleries, and one third of this is returned to the fodder market as high protein feed, meat and poultry organisations have recently called on the US Environmental Protection Agency to waive the Renewable Fuels Standard, which mandates that 13.2 billion gallons of ethanol be produced this year. (The RFS was created in 2005 and scaled up in 2007 in order to reduce reliance on imported petroleum and cut back carbon dioxide emissions by setting quotas for the use of biofuels).

The hope spurring this waiver call is that it would reduce the amount of corn diverted towards ethanol production, and would consequently lower the price of corn as demand would drop. For the RFS to be waived, however, it needs to be proved that it is inducing economic harm on livestock producers who can not afford to pay for corn at the heightened price levels.

Relieving pressure on corn prices

Although more than 150 members of congress are supporting the call according to news reports, there is currently no indication from EPA that it will waive the RFS mandate.

The OMR points out that US ethanol stocks are fairly high at 800 million gallons, providing the possibility to satisfy at least part of the 13.2 billion gallons mandated for 2012.

In addition, according to the Renewable Fuels Association, around 2.5 billion ethanol credits, so-called Renewable Identification Numbers (RINS), have been banked in recent years as refiners blended more ethanol than was required by the RFS.  

“These RINS provide some flexibility for blenders to meet the 2012 RFS requirements despite the projected lower ethanol output, and could help reduce some of the pressure on corn prices,” the OMR concluded.

Recent analysis also suggests that a RFS waiver might not have as strong as an effect on corn prices as some might hope. Most refiners have adjusted to replace around 10% of their gasoline production with ethanol and in addition have adopted ethanol as an octane enhancement for regular gasoline, both of which could mean domestic demand might remain strong even without the mandatory ethanol quota in place.

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