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The New Taboo: Ethanol
In mid-November the Environmental Protection Agency proposed the first cut in the amount of ethanol that must be blended into the nation’s gasoline supply. The move represents one of the biggest setbacks to date for ethanol. Under a 2007 law,
refiners were supposed to blend more than 14 billion gallons of ethanol into the nation's gasoline supply in 2014. Refiners and oil
companies called the level too high, citing that the higher blend could damage engines, and the EPA said it had authority to roll
back the congressional mandate.
The EPA also said it was reacting to market conditions that include an unexpected slowdown in consumers’ demand for gasoline,
which means the ethanol supply could soon outpace the amount motorists could actually use. The oil industry is trying to argue that
the result could be a spike in gasoline prices (unless the government scales back the ethanol requirement) resulting in what the
mandate opponents call the “blend wall.”
The specifics of the proposal are a proposed blend of corn ethanol between 12.7 and 13.2 billion gallons. The current mandate is
14.4 billion. However, the current blend is expected to be somewhere between 12.8 and 13.1 billion for the year ahead and, due to
gasoline consumption not as strong as forecasted, a blend wall is already in place. Ethanol numbers are currently favoring grinding
of corn and, consequently, there are some who believe the 2014 number could actually grow to 13.6 to 13.7 billion gallons. Yet,
from a big picture perspective, what the proposed mandate suggests is a limited or no-growth scenario for ethanol from current
What's the impact for near-term corn prices? On the one hand, usage and the export market for ethanol remains active and strong.
On the other hand, future growth is limited, and this will likely have greater impact on deferred year's prices. Some recent studies
have suggested that corn prices might drop approximately 25 cents on the news, believing that corn production would fall by about
100 million bushels, and ethanol production would drop by about 11% from reduced mandates.
In the end, the ruling suggests corn producers need to sharpen their pencils when looking at pricing opportunities. Gone are the
days of unbridled enthusiasm for endless use of corn as an energy provider. Markets have a tendency to move on perception
and momentum. And for now, if the perception is of limited usage in ethanol, then it's highly likely that the market pricing picture
suggests limited rally potential for corn prices for now.
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