As indicated above, we expect corn feeding and exports to decline modestly this marketing year. Our projections place exports at 185 million bushels less than last season and domestic feed and residual use down about 42 million bushels from USDA reported 2010-11 feed and residual use (although we anticipate the cut from total use of all feed grains will be more like 160 to 200 million bushels). These two uses of corn are the third and second largest sources of demand, respectively. The largest source of demand is corn food and industrial use, which is strongly influenced by government ethanol blending mandates.
Figure 4 shows the relative sizes of these three corn use categories in the 2010-11 marketing year ended August 31. The composition of demand for corn has changed dramatically in the last seven years, with rapid growth of corn processing for ethanol and DGS. Food, industrial, and seed use has expanded to almost ½ of the total demand for U.S. corn. A key question in corn-user adjustments to this year’s reduced supplies is whether corn use for ethanol will be reduced. USDA October 12, 2011 projections show only a 20 million bushel reduction from last season in that use category. If so, livestock feeding and/or exports will need to be reduced more than we are projecting.
The ethanol-DGS portion of the demand is strongly influenced by (1) the price of gasoline, (2) government ethanol blending volume mandates from 2007 energy legislation, (3) the ethanol blenders’ tax credit, and (4) the price differential between gasoline and ethanol. Recent political developments and federal budget pressures strongly suggest that the 45 cents per gallon ethanol blenders’ tax credit will not be renewed when it expires at the end of this year. Thus, one major incentive for blending ethanol with gasoline will likely disappear. However, the mandates are expected to remain in effect. When corn supplies are extremely tight, the mandates create a perfectly price-inelastic demand for corn used by ethanol plants -- at certain minimum volumes, In other words, the amount of corn used for ethanol becomes insensitive to corn prices. At plentiful corn supplies and lower prices, the ethanol industry tends to produce ethanol above mandated levels if infrastructure permits it. If corn supplies become tight, the motor fuel industry is required to blend the mandated volumes of ethanol into gasoline, paying whatever price is needed to obtain the ethanol. This, in turn, would allow ethanol processors to pay whatever price is needed to obtain the required volume of corn for mandated ethanol blending.
The ethanol industry has been producing above mandated levels in the last few years. Excess production generates excess RINs, the renewable information numbers for each gallon of biofuel produced . These excess RINs can be substituted for actual ethanol blending with gasoline, provided their useable life hasn’t expired and provided they haven’t been used for ethanol exports. Ethanol exports don’t count toward the mandates but do require RINs. Ethanol export demand has been increasing in the past two years. In corn-equivalent terms, the ethanol from about 310 million bushels of corn appears to have been exported in the marketing year ended August 31.