In 2011, the US produced 986m gallons (3.7bn litres) more ethanol than was required by the federal mandate known as the Renewable Fuel Standard (RFS2). In doing so, the industry consumed a total of 4.85bn bushels of corn. About 30% of that corn returned to the food market as livestock feed in the form of “distillers’ dried grains”.
Through July 2012 (the last date for which official government data is available), 7.8bn gallons (29.5bn litres) of ethanol had been produced in the US, consuming close to 2.8bn bushels of corn. To satisfy the full year 2012 federal mandate that 13.2bn gallons (49.9bn litres) of ethanol be blended into the US fuel supply, the market will require 5.4bn gallons (20.4bn litres) further production between August and December. Assuming all this ethanol is produced in the US, demand for corn from August until December 2012 will be approximately 1.9bn bushels.
As the 2012/13 corn harvest is only now on its way we believe ethanol producers will not start using this year’s planted corn until November. Corn demand for compliance with this year’s federal blending mandate will therefore be closer to 777m bushels, or 7.2% of the 2012/13 harvest.
On Wednesday 12 September, the USDA revised its corn production estimate to 10.73bn bushels – fractionally down from its August estimate of 10.78bn bushels. In 2013 the federal mandate for ethanol rises to 13.8bn gallons (52.2bn litres), which will require an additional 4.1bn bushels of corn between January and October from the 2012/13 harvest – about 38% of the new September estimate.
To comply therefore with the federal mandates for November to December 2012 and January to October 2013 periods, corn ethanol producers will use about 4.9bn bushels of the 2012/13 harvest – or about 45% of new September USDA estimate. As in previous years, roughly 30% of corn harvest’s protein will make it back into the feed market as distillers’ grains.
Regarding ethanol prices, by Q4 2012 and with an average corn price of $7.70 per bushel, we project the US marginal ethanol supply cost – when including imports from Brazil – will stand at $3.15 per gallon ($0.83 per litre). When Brazilian ethanol imports are excluded from our analysis, the marginal supply cost climbs to $3.35 per gallon ($0.89 per litre). With future ethanol prices for delivery in Q4 2012 averaging $2.46 per gallon ($0.65 per litre), our marginal supply cost analysis suggests a gap between how the market is pricing ethanol and the underlying production costs of between $0.69 and $0.89 per gallon ($0.18 to $0.24 per litre) in Q4 2012.
Futures prices for ethanol delivered in the next six months are diverging sharply from projected production costs, especially when accounting for the current record-high corn prices. The market appears to be pegging ethanol’s future price to gasoline, which should fall as the winter driving season arrives. However, short of a major US policy change – like a relaxation of the RFS2 – we anticipate corn will put upward pressure on ethanol prices, while it is unlikely there will be significant imports from Brazil due to an anticipated policy change there.