Record U.S. production could go higher if corn prices rise

Source: Marc Heller, E&E reporter • Posted: Friday, February 12, 2016

Ethanol production in the United States likely reached a new high in 2015, fueling another big year for exports, economists at the University of Illinois reported.

In a weekly outlook published yesterday, University of Illinois economist Darrel Good said recent federal reports suggest ethanol production totaled around 14.76 billion gallons for the year, topping 2014’s record production by 3 percent. The U.S. Energy Information Administration hasn’t released official numbers for the year.

The expected banner year for the mostly corn-based fuel comes as the federal renewable fuel standard faces particular scrutiny in a presidential election year. The mandate is likely to maintain or even grow ethanol consumption in 2016, even with ethanol prices outpacing gas prices, which have been falling, Good wrote.

Because Canada and other importers of U.S. ethanol have their own alternative fuel mandates, exports will remain strong in 2016, he said. In 2015, fuel ethanol exports accounted for about 5.7 percent of U.S. production, or 300 million bushels, Good said.

Domestic consumption was about 13.91 billion gallons, while exports of fuel ethanol totaled about 844 million gallons, roughly unchanged from 2014. Canada is the biggest U.S. customer, according to the report.

At the same time, U.S. ethanol imports were around 93 million gallons in 2015, mainly from Brazil, according to the report.

The rosy picture for ethanol production also coincides with forecasts of rising corn prices into the summer, just as farmers are beginning to make planting decisions for spring.

That’s because a strong El Niño — the warming of waters in the tropical Pacific — will soon cycle to the cooling of the waters called La Niña, said Paul Bertels, vice president of production and sustainability at the National Corn Growers Association, a lobbying group for producers.

La Niña can mean less rain in corn-producing regions — but not always, Bertels said. Out of 15 especially bad years for U.S. corn growers since 1950, eight have been La Niña years, Bertels said.

“So I take that as a 50-50 chance,” he said. “I think it’s just a crapshoot at this point.”

For many farmers, the choice comes down to planting corn or soybeans. Rising corn prices could spur farmers to plant more of that, although soybeans are cheaper to plant, Bertels said.

Corn futures at the Chicago Mercantile Exchange yesterday ranged from around $3.62 per bushel for March delivery to $3.77 for July, with traders betting on prices to reach $4 per bushel by summer 2017. Farmers’ cost of production is typically between $3.75 and $4 per bushel, he said.

The market will take more signals from a world agricultural outlook report due for release today, as well as from reports on intended plantings in a few weeks.

Although corn is the main production cost for ethanol plants, it’s only a piece of an economic picture that’s shaped largely by oil and gas prices, said Dan Sanders, vice president of Front Range Energy LLC in Windsor, Colo., and a member of the board of Growth Energy, a lobbying group for ethanol producers.

“There’s not really a magical number that helps us or hurts us,” Sanders said.

The gap between ethanol and gas prices, however, has the industry’s attention. With wholesale gas prices as low as 99 cents per gallon and ethanol trading around $1.43 per gallon, ethanol isn’t as attractive as in the past, and “our margins are razor-thin right now,” said Geoff Cooper, senior vice president at the Renewable Fuels Association, a trade group.

With ethanol more expensive than gas for now, Cooper said, ethanol advocates have to adjust their message to Congress, noting the fuel’s value against more expensive sources of octane, for instance.

“It’s a lot easier to talk about when it’s 50 cents or even a dollar lower,” Cooper said.