Factors affecting blending economics
Without a blenders’ tax credit, the economics of blending more ethanol than mandated will depend partly on the premium of gasoline prices over ethanol. Premiums reflected by nearby and distant futures markets on November 8 are shown in Figure 5. The ethanol discount to gasoline is small or non-existent in the nearby futures months but increases gradually in distant futures to 30 to 40 cents per gallon in some months. This relationship is not a forecast, but is an approximate pricing opportunity for blenders, although it should be cautioned that the distant contracts are thinly traded. Large-volume trading might alter the relationship. Basis relationships will be another factor influencing blenders’ decisions. Incentives for blending ethanol with gasoline vary over time and may also be influenced by potential reductions in costs of the enhancing gasoline octane content with ethanol blending. At times, the fuel industry may have incentives for blending more ethanol than required by EISA mandates, even without the blenders’ tax credit.
Data on grain production and stocks used in this report are from NASS, USDA and WAOB, USDA. Ethanol and DGS data are based on EPA, EIA, and USDA, ERS. Grain, gasoline, & ethanol price data are from AMS, USDA and CME
1 World Agricultural Outlook Board, World Agricultural Supply-Demand Estimates, WASDE-499, November 9, 2011.
3 NASS, USDA, Crop Production, November 9, 2011, Washington, D.C.
4 Energy Independence and Security Act of 2007 (EISA), U.S. Congress.
5 For an explanation of RINs, see Wisner, “Renewable Information Numbers (RINs) and government biofuels blending mandates,” Renewable Energy Newsletter, Ag Marketing Resource Center, April 2009.
6 Wisner, “Ethanol exports: what’s the trend and where are they being shipped,” Renewable Energy Newsletter, Ag Marketing Resource Center, March 2011
7 AMS, USDA, Iowa ethanol and co-products processing values and AgMRC ethanol model