In the initial depths of the recession, agriculture was performing well, thanks to the demand for grain, and in particular for corn because of the demand for ethanol. The ethanol mandate was creating demand for corn and prices kept rising, pushing commodity markets to new highs nearly every month. Ah, those were the good old days. Now the bloom is off the rose. Gasoline demand is down, the blend wall is pushing ethanol demand down, and corn prices are not as strong as they once were. Was Little Orphan Annie correct in assuming “The sun will come out tomorrow?”
When the Congress approved the Renewable Fuel Standard, conventional wisdom said by this time we would be consuming 150 billion gallons of motor fuel annually and a 10% ethanol blend would necessitate 15 billion gallons of ethanol, which would require nearly 5 billion bushels of corn. But the recession dampened the upward demand curve, and now the current thinking is the need for only 13.4 billion gallons of ethanol to meet the demand. That has reduced the demand for corn and batted back the price from the nearly $8 high. The goal of 15 billion gallons of corn-based ethanol may be a footnote in an economic history book.
There are a number of dynamics working for and against ethanol today as a product that will remain integral to the agricultural economy, says Bob Wisner, biofuels economist at Iowa State University.
In his recent newsletter Wisner says domestic ethanol use will be about 11% below the 15 billion gallon ceiling in 2015, when cellulosic ethanol was supposed to kick in and supply the nation with its voracious appetite for motor fuel. He indicates 2015 may see about 3 billion gallons of cellulosic ethanol produced because the industry has had a much slower start to economic efficiency than expected. But in the meantime, lower demand for gasoline means less demand for ethanol, regardless of its source and less profitability means reduced efforts in reaching the goals. And he says the US ethanol industry will be capable of producing much more than needed if gasoline demand drops further, either because of the recession or increased fuel efficiency.
The blend wall, which is the ceiling for ethanol demand, could be raised with the use of E-15 or E-85, but there are major problems, mostly related to the lack of pumps at service stations and the reluctance of the auto industry to warrant the use of higher ethanol blends. That not only retains the blend wall but stifles the demand for cellulosic ethanol. While EPA has been giving indications it will expand its approval of E-15 that may have little impact if distribution is non-existent. Wisner says the future of the ethanol industry is keyed on the production and distribution of advanced biofuels, which do not include ethanol made from corn. That will be capped at 15 billion gallons of basic ethanol. While that seems like the biofuels market is mature for corn growers, Wisner says there may be an opportunity from advanced biofuels, with the conversion of corn to biobutanol.