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Ethanol corn demand is back

It's no secret that ethanol is a big force in the corn market. In fact, projected use by the industry will be about twice as big as the corn export market in the 2009-2010 marketing year.

Out of the 2009 corn crop of some 13 billion bushels, the USDA expects ethanol makers to use 4.2 billion bushels, almost a third of the crop. That's up substantially from USDA's estimate of 3.7 billion bushels turned into fuel and feed in 2008.

Some private analysts are even more optimistic.

"Rabobank's forecast is 100 million bushels above the USDA's current estimate," the bank's London-based analysts Luke Chandler and Doug Whitehead reported recently. "Industry sources indicate that capacity utilization has improved substantially in recent months, and mothballed plants are gradually being brought back online. In addition, construction projects for new plants that had been abandoned are being resurrected, with 15 new or expanded plants due to come online over the coming marketing year."

The analysts aren't certain how much idle capacity will come back. But after spending most of 2008 and early 2009 running in the red, ethanol plants have seen modest profits recently.

Cheaper corn, which accounts for over half of an ethanol plant's variable costs, is an obvious factor in that turnaround. Another is a steep drop in natural gas prices, says Jerry Gidel, an analyst at North American Risk Management Services in Chicago. Natural gas powers most ethanol plants and accounts for at least 20% of their costs.

"Natural gas is as cheap as it's been in eons," says Gidel.

In July of 2008, it was selling for $12 per 1,000 cubic feet; by last summer it had dropped to about $3.50. Last fall it was running at about $5, and Gidel didn't see a repeat of the 2008 prices anytime soon.

At about the same time natural gas fell, ethanol was selling at about a 50¢ discount to the unleaded gasoline it's blended with. Along with a 45 cents excess tax credit, ethanol was suddenly an attractive fuel for blenders. The discount recently narrowed.

The biggest factor in increased demand, though, is the federal mandate, the renewable fuel standard. In 2010, it goes up another 1.5 billion gallons, to 12 billion gallons.

Mainly because of that higher mandate for blenders to use ethanol, Gidel agrees with Rabobank's more optimistic projection for 4.3 billion bushels of corn going into ethanol in this marketing year.

"I wouldn't put it any higher than 4.3 billion," he says.

That's because the industry is producing enough ethanol to supply a 10% ethanol blend in most markets. Unless EPA raises the allowable amount of ethanol in gasoline, producers won't have a ready market.

The trade group, Growth Energy, has petitioned the EPA to boost the blend to 15%, but the industry wasn't expecting a favorable response.

One compromise proposed to EPA is to raise the blend to 12%.

"There's still a strong possibility we could get the 12%, if the corn market shows we have the supply," Gidel says. If that happens, ethanol demand for corn could go up another 200 to 300 million bushels.

With little increase in ending corn stocks expected in 2010, that could make a difference, says University of Illinois ag economist Darrel Good.

"If USDA has projected categories of use correctly, a couple hundred million bushels more of corn use would really tighten up stocks quite a bit," he says.

Good thinks some increased ethanol demand has already been factored into prices, especially with rumors of U.S. ethanol exports to Brazil. So don't look for the glory days of $7 corn to return. "What we're hoping for this year is getting a shot at $4 corn," he says.

It's no secret that ethanol is a big force in the corn market. In fact, projected use by the industry will be about twice as big as the corn export market in the 2009-2010 marketing year.

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