KANSAS CITY - The ethanol industry is mature and not likely to grow from its
current size, Robert McNally, president of the Rapidan Group in Washington
DC, told attendees at a symposium on recognizing risk in global agriculture
held today at the Federal Reserve Bank of Kansas City.
"Ethanol policy has peaked; it will be lucky to hold on to its
15-billion-gallon mandate," he said.
"Ethanol has enjoyed a triple crown of policy support," he noted: mandated
use, tariffs against imports and blenders being paid to use it. "Now its
fortunes have fallen and the speed of decline in support has been
surprisingly rapid."
The first signs of a shift away from support came in 2008 when the food vs.
fuel debate heated up, he said. Now, the environmental and agricultural
groups are bickering, reducing support for the policies. "As long as cap and
trade was on the table under the Bush Administration, the 'greens' were
willing to support ethanol. Now, it is off the table and green support for
agriculture's program is rapidly wilting -- ethanol is viewed as a
relatively expensive way to reduce carbon emissions."
However, Bruce Babcock, an Iowa State University ag economist who
specializes in ag policy, noted that ethanol plants are viable without
government support at this stage. "Margins were $1.30 to $1.50 for a long
time. An investor could pay off a 100-million-gallong plant in 12 months."
Both McNally and Babcock said the blenders' credits are clearly on the
budget-cutting table and are likely to wind up on the cutting room floor.
The mandate seems more likely to hold its own, at least for now.
At $100/barrel crude oil and with E10 pricing, the value of a bushel of corn
to an ethanol plant, including ethanol and distillers dried grains, is about
$7.75, Babcock estimated. If crude rises to $120/barrel, an ethanol plant
could pay as much as $9.75/bu., but at $60 crude, corn's value drops to
$3.75. "So world crude oil prices are a big risk factor for the industry."
The mandate provides a safety net for blenders and farmers, McNally added.
"By forcing minimum purchases of ethanol, it protects those sectors against
a drop in crude -- and therefore ethanol -- prices."
Elimination of the blenders' tax credit would likely mean the price of
ethanol received by the plant would drop 6% from $2.43 to $2.28. Plants
would reduce ethanol production a modest 4.7% or 600 million gallons, from
13.82 to 13.16 billion, Babcock estimated. "Corn price this year would
decrease 9.4% from USDA's July estimate of $6.27 to $5.68/bu."
Assuming $100 crude, if the mandate were eliminated, on the other hand,
ethanol production would drop more substantially -- to 10.9 billion gallons,
as the plant price drops to $2.17. "Corn price decreases to $5.30/bu.," said
Babcock. "But this is still a viable market." Should oil fall to $80,
however, ethanol production would plummet almost 6 billion gallons and corn
prices would follow suit.
McNally predicts we will see wide swings in oil prices, noting that
petroleum has, in fact, ranged from $34/barrel to $137/barrel in a single
year. "It now is hard to grow capacity in crude oil production," he said.
"And there is no global cartel stabilizing prices. OPEC is not investing in
its tools to control production, so volatility will continue. Will we see
$60, $100, $160 crude? Yes we will."
That makes a good case for not totally removing the mandate.
Fuente: (DTN)
Ethanol: A Mature Industry that Has Lost Political Clout
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