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Cheap Oil Pressures Ethanol

Consumers and many economists welcome cheap oil and gasoline. If you’ve had the feeling that all of this isn’t good for agriculture, you may be right.

The ethanol industry is seeing margins fall right along with Brent crude. After a year of record profits for many ethanol producers, biorefineries are in good shape in the short run. However, if low oil prices drag on for months, they’ll see losses and may also face even greater political pressure in Washington to repeal the Renewable Fuel Standard. On Friday, Senators Pat Toomey (R-PA) and Dianne Feinstein (D-CA) introduced an amendment to a Keystone XL Pipeline bill that would eliminate corn ethanol from the RFS. The Renewable Fuels Association said the Toomey-Feinstein amendment “would set U.S. energy agenda back decades.”

Oil companies understandably don’t like giving up market share to ethanol, but for years blenders have been able to add 10% ethanol to gasoline as a relatively inexpensive source of octane. Now that advantage is disappearing. On Friday, nearby CME February delivery futures contracts for ethanol closed at $1.35 a gallon, and RBOB gasoline futures were nearly on par at close to $1.36. On the spot market, ethanol can be more than gasoline. The U.S. Energy Information Administration was listing RBOB prices at less than $1.30 a gallon in several locations, while reports of spot ethanol prices were well above $1.30 even in the Midwest.

“The ethanol mandate since 2007 has rarely been binding,” said Scott Irwin, a University of Illinois agricultural economist who is an authority on the RFS. That’s because ethanol was a cheap source of octane and now oil refiners have changed their gasoline mix to accommodate that cheaper octane. In the current market, “it’s basically been reversed,” he said.

Changing the refining process to make gasoline that doesn’t need ethanol costs something, and Irwin said he doesn’t yet know if it will pay for refiners to do that.

Iowa State University economist Chad Hart agrees that the changing blending economics could be an issue.

“If they (refiners) think this is going to last six months, then they might make the move,” he said.

Earlier this week, Senator Chuck Grassley told Agriculture.com that he’s concerned about renewed pressure on the RFS.

“I think we have a battle on our hands,” he said.

“We have the advantage. The RFS doesn’t sunset,” he said. Unlike a farm bill that expires roughly every five years, the 2007 energy law that set blending mandates doesn’t expire. Grassley added that RFS opponents would first have to get a bill passed in the Senate. If that happens, then “hopefully the President vetoes a bill like that.”

In the short run, falling prices and a modest increase in gasoline sales make the pool of gasoline for blending ethanol larger if the RFS stays in place and expands, as the ethanol industry hopes the EPA will do this year.

“Short-term, I think this will be positive for ethanol,” said Frayne Olson, an ag economist at North Dakota State University. “We’re driving more miles and using more gasoline. That should help the corn market.”

And, so far, some ethanol plants remain profitable.

At Lincolnway Energy in Nevada, Iowa, where farmer Jeff Taylor is board chairman, “margins have tightened up significantly,” he told Agriculture.com. But they are in the black. “We’re probably coming off one of the best years we’ve experienced. We’re still sitting on a strong cash balance at our local bank.”

At KAAPA Ethanol in Minden, Nebraska, margins are also tight. “It’s kind of bouncing back and forth for us, between positive and negative,” said Paul Kenney, a Kearney, Nebraska, farmer who is president of ethanol business.

Although ethanol plants are strong now, Irwin expects the industry to have a tough year. Unless corn prices drop, Irwin said, “I think that the industry will struggle mightily.”

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