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Ethanol still faces choppy seas

The battle lines were drawn earlier this year, and with action Friday by the U.S. Environmental Protection Agency (EPA), the fight's over for now.

Leaders of EPA on Friday upheld the federal Renewable Fuels Standard (RFS), a move that preserves the 5 billion-gallon mandate for the corn-based fuel that came under fire this summer after the nationwide drought slashed crop potential, hiked corn prices, and fueled worries that a short crop may not be enough to meet massive demand.

The fight over the waiver pitted livestock and crop producers against one another, with the former facing sharply higher feed input costs, while the latter saw higher grain futures prices because of the drought. But as the year went on, some in the industry saw the ethanol sector as a minor influence on overall corn prices. And it's that line of reasoning, market-watchers say, that led to EPA's waiver denial.

"It's not ethanol that's driving up commodity prices, it's Mother Nature and the drought," says Bob Dinneen, CEO of the Renewable Fuels Association, adding that the industry has scaled back -- just like other sectors -- because of the drought.

"The ethanol industry is down about 11% or 12% of our production, and you're seeing exports reduced and feeders looking for other sources of feed. That's how the marketplace does respond to these conditions, and that's how it should be," he adds.

How will the grain marketplace respond to Friday's ruling? With a brief acknowledgment and likely not much more, says grain broker and market analyst Jason Roose of U.S. Commodities in West Des Moines, Iowa. The waiver's denial was already factored into prices for the most part, he says, especially considering the fact that few saw the request as having much of a viable future.

"I think it was a very thin chance that it would have passed. I think it was kind of a nonissue," Roose says. "I think a lot of this is probably factored into the market. The demand situation's been almost solved. This really started back whenever we have a short crop."

Though Friday's ruling, on paper, should keep ethanol production chugging along, that doesn't mean the sector -- which has itself been under pressure from drought-fueled higher corn prices -- will see choppy seas smooth out much too soon, says Cargill Senior Grain Merchandiser in Eddyville, Iowa, Ray Jenkins.

"There are many, many, factors in these markets right now. I think you need to understand that the ethanol business is kind of a 'sick pup' right now, with no clear path to improving weak/negative margins," Jenkins says. "To make things even more murky, a big rally in ethanol price would interest Brazil in selling more product into the U.S. Like I said, there is no easy path to the good old days of just 12 months ago!"

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