U.S. Ethanol Production Slows in Mid-2012
9 October 2012 Drought in the United States has caused a sharp increase in corn prices, leading to a reduction in ethanol production, according to a Phillips McDougall report.
U.S. production has increased consistently year-after-year, with a record 13.9 billion gallons produced in 2011. However, the removal of the subsidy for blending ethanol with fuel has eroded profits.
In addition, rising maize costs due to severe drought in the central Corn Belt significantly affected ethanol production. As a result, the cost of the feedstock for ethanol production has risen significantly.
In the past, the profitability of ethanol production could be assessed by comparing the price of corn with the prices of the competing technology, oil. In 2008, the prices of all three commodities – natural gas, oil, and corn – were in equilibrium and profitable ethanol production was sustained. But toward the end of the year with a tightening of economic conditions, oil price declined significantly, well below the price of corn, which cut the use of corn for ethanol production, according to the report.
Overall, USDA projects U.S. maize production to fall 13.2% in 2012 from 2011 to 10.7 billion bushels –almost as low as in 2006 when the U.S. ethanol sector was just starting to expand.
The U.S. Energy Independence and Security Act of 2007 called for 36 billion U.S. gallons of ethanol to be produced by 2022. Corn and other grain based ethanol is expected to account for up to 15 billion gallons or 41.6% of the total, with 21 billion U.S. gallons coming from cellulosic and biomass sources.
Effectively, 15 billion gallons of ethanol production from maize has been mandated. In 2011, 13.8 billion gallons of ethanol was produced in the USA, with capacity at that time in place for 14.8 billion gallons. Clearly, ethanol production will not reach this level in 2012.
However, with an expected significant increase in corn planted areas in 2013, and as long as weather conditions are more normal, a significant increase in corn output and lower price for the commodity could result in ethanol production approaching this mandated limit in 2014.
When this limit has been reached, if there are good harvest years and excess production of corn, this excess will not be absorbed by ethanol production, but will be free for trade on food and feed markets. Then, prices could fall with implications for the level of corn planted in the country.
Source: Phillips McDougall, edited by Stefanie Valentic, Online Editor
Get The Newsletter Today!
