Governors' Biofuels Coalition

The weekly spot price for ethanol in Iowa fell to $1.27 a gallon in the middle of January, from $2.42 at the end of November, according to Scott Irwin, an agricultural economist at the University of Illinois.

“That was the lowest price I have seen since I started tracking ethanol prices in 2007,” Irwin said.

At prices that low, profits have evaporated for ethanol producers. If producers slash output in response to weaker profit margins, they will use less corn and already depressed corn prices could fall even more. More than a third of the nation’s corn supply is used to make ethanol.

Corn growers were hoping ethanol production would increase this year after makers of the renewable fuel enjoyed some of the best profit margins in years in 2014. Ethanol helped profits grow 46 percent in Archer Daniels Midland’s corn-processing division.

Demand for ethanol also has been increasing internationally. Exports grew more than 25 percent last year.

Rolling back the mandate to 13 billion gallons as the EPA has proposed would lower food prices, proponents say. But the Renewable Fuels Association and other ethanol supporters counter that lowering the mandate would harm the economy and the environment.

Even without the mandate last year, domestic consumption of ethanol was about 13.6 billion gallons, said Bob Dinneen, chief executive officer of the Renewable Fuels Association. Almost all of the gasoline sold in the United States contains 10 percent ethanol.

The sharp decline in gas prices last year, though, raised questions about the competitiveness of ethanol. Historically ethanol has traded at a discount to gasoline, making it profitable for gasoline blenders to use over other petroleum-based octane enhancers.

But starting in mid-November, wholesale gas prices fell below the price of ethanol and stayed that way until the end of January, said Ben Buckner, an analyst at Chicago-based AgResource.

“Ethanol is much less efficient than gasoline,” Buckner said. “For it to be more valuable than gas is rare. Gas moved faster downward than ethanol.”

The unusual situation has led to a more than 20 percent increase in stockpiles of ethanol, as gas blenders curbed their use of the renewable fuel. In January, inventories hit more than 20 million barrels, the first time they’ve crossed that mark since March 2011, according to the U.S. Energy Information Administration.

Excess inventories combined with the overall slide in energy prices have sent ethanol prices tumbling. ADM cautioned Tuesday that ethanol profit margins “should remain challenged until supplies are better aligned with demand.”

ADM’s stock price has slumped since the beginning of the year, down 6.2 percent.

Producers are used to ethanol’s volatility. In 2008, prices fell sharply because of the recession, and four years later several ethanol plants closed because the price of corn shot up to more than $8 a bushel, more than double the price of corn futures for March delivery.

In the last few days, some order has been restored to the gas and ethanol markets. Gas has gone from a 1 cent discount to ethanol to a 17 cent premium, Buckner said. There are no signs that ethanol prices will increase dramatically in coming months. Ethanol futures for March delivery, the front-month contract, settled at $1.43 a gallon Tuesday at the CME Group.

Irwin is optimistic that ethanol demand will hold steady from 2014 to 2015, at about 13.5 billion gallons. Consequently, corn use for ethanol should remain at last year’s levels.