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.
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.
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.
"We have to remember that RFS volumes are a minimum and production of renewable fuels can always be higher," he notes.
The primary demand for corn ethanol is the 10% blend with all gasoline sold in the U.S. The amount of ethanol needed to meet this demand depends on how much gasoline is consumed for the rest of this year and into next.
Hurt said he expected 2013 gasoline consumption to be near 133 billion gallons and slightly less for 2014.
"This means ethanol consumption will need to be about 13.2 to 13.3 billion gallons – a number that is above the EPA proposal and would require almost 4.9 billion bushels of corn," he said.
Consumption of E85 is another area of potential growth for the corn ethanol sector. But a gallon of E85 produces less mileage than higher gasoline blends, Hurt says. That means gasoline prices would have to be much higher or E85 prices much lower to spark demand growth.
"While ethanol and E85 are not sufficiently low-priced right now to make greater E85 use economic, low corn prices would be one of the conditions that could provide lower E85 prices later in the marketing year," Hurt said. "For example, February ethanol futures are 60 cents lower than current cash prices."
Don't count out exports
Another area of potential corn ethanol demand is exports. Low corn prices will eventually mean lower ethanol prices, making U.S. ethanol more appealing to foreign buyers. It also means the U.S. can produce its own ethanol cheaper than importing it, thus creating domestic demand.
Hurt said there are clear indications that exports will continue to grow, while imports have all but stopped.
"While it is still too early to make accurate predictions of trade volumes, net exports in the range of 400 million to 550 million gallons of ethanol might be likely," he said. "If so, that could add 150 million to 200 million additional bushels of corn use for ethanol.
Greater corn use for ethanol could help growers who are hoping for some price recovery for the 2013 crop. According to Hurt, corn use for ethanol could exceed the USDA projections by about 100 million bushels.
While that alone wouldn't be enough to bring corn prices back to $5 per bushel, corn exports also are currently pacing above USDA projections, which could lead to some price increases.
"These two support a growing usage base that is being stimulated by low corn prices and should help corn prices to establish a bottom before beginning a modest rally," Hurt said.
The extent to which corn prices recover could also depend on likely upward revisions to the final 2013 corn crop size by USDA on Jan. 10, he says.