Ethanol tops out
Chuck Woodside, CEO of KAAPA Ethanol near Minden, Nebraska, is obsessed with corn this fall. By October, he had heard of irrigated yields as high as 250 to 300 bushels an acre farther east in the Platte River valley. He asked other ethanol plant managers at a board meeting of the Renewable Fuels Association and was told by several that local yields were better than they expected.
Still, corn is scarce, and margins are as narrow as he can remember since his farmer-owned plant started in 2003. He knows that some ethanol makers will continue the pattern of temporary shut-downs that started last summer.
“You're going to see dislocations that will be based on local corn supply, and I think it's going to be this way for a lot of the year,” says Woodside, who just wrapped up two years as RFA chair.
Every year but one since 1980, the corn ethanol industry has grown. The 2012-2013 marketing year will be the first time since calendar 1996 when production will fall. (In 1996, the industry was squeezed between a low gasoline price of $1.27 a gallon and corn that averaged $3.81 per bushel.)
A recent Rabobank analysis forecasts a decline of 11% “within the bounds of the ethanol mandate, dictated by the needs of gasoline refineries, with further declines possible (but not likely).”
Earlier this fall, the U.S. Department of Energy reported that the nation's ethanol production fell to 785,000 barrels a day (or almost 33 million gallons). That's the lowest level since the DOE started tracking production in 2010.
Production was running at an annual rate of 12.43 billion gallons.
That's far below the 2011 record of 13.9 billion gallons. And it's on track to meet Rabobank's projection of an 11% decline in output for the 2012-2013 marketing year that began in September.
USDA also expects lower marketing-year ethanol production, which translates into 500 million fewer bushels of corn being distilled into fuel in the current marketing year than last year. The industry will likely buy 4.5 billion bushels of corn, off from last year's 5 billion, according to USDA's monthly Supply and Demand estimates.
All of this means that the ethanol growth that has driven corn prices is sputtering as it nears the maximum 15 billion gallons allowed under federal mandates by 2015.
“I think from here on out, I like to call it a steadying influence,” says Iowa State University economist Chad Hart. “It won't continue to pressure prices higher, but it will help to maintain a floor.”
Six years ago, USDA long-term projections for corn prices were around $2.50 a bushel. Last spring before the drought, USDA projected corn at about $4.50 a bushel. “What's the change? The change is ethanol,” Hart says.
Red Ink arrives
By summer of 2012, many ethanol makers were losing money. Among the few publicly traded companies devoted mainly to ethanol production, Green Plains Renewable Energy in Omaha, Nebraska, and Golden Grain Energy in Mason City, Iowa, are windows into industry losses.