At the end of 2011 Congress allowed the tax credit for ethanol blending to expire, along with the tariff on imported ethanol, as well as the blenders’ credit for biodiesel fuel. The tax credit for production of ethanol from biomass remains, but is scheduled to expire at the end of the current year. Since the expiration of the ethanol supports, the EPA has allowed the ethanol blend in motor fuel to rise from 10 percent to 15 percent, but automaker acceptance and the needed infrastructure are dynamics that are not yet in motion to support ethanol. Given all of those issues, what is the future for ethanol and its consumption for a large quantity of U.S. corn? That is an important follow-up question to the preceding Farmgateblog posting about the impact of ethanol’s savings on the price of gasoline.
Now that ethanol has been weaned from financial support, but still relying on mandated use and an increased blend allowance, the University of Missouri’s Food and Agricultural Policy Research Institute (FAPRI) conducted an economic analysis on how ethanol would weather the storm over the next ten years, given demand issues, along with the competition from Brazilian ethanol. The FAPRI report draws numerous specific conclusions.
Among those is a projection that ethanol production will grow, but much slower than over the prior ten years, particularly since conventional corn-based ethanol does not qualify to meeting the qualifications of advanced biofuels. The subsequent slowdown in production of corn-based ethanol is expected to reach a maximum annual use of corn at 5.6 billion bushels, after the 2014-15 marketing year, with more corn available for the food, feed, and export markets.
FAPRI believes that ethanol will be driven more by mandates than the market, and the market for ethanol will be driven more by E-85 than by the 15% blend, if E-85 availability and use will catch on. Their forecast is for the overall amount of ethanol in gasoline will only be at 13.2 percent by the year 2021. The economists determined that a higher use will only occur with more E-85 use, and that will only happen if the price of ethanol falls below the gasoline energy equivalent. They say once the flex fuel fleet grows enough, the ethanol price returns to its energy equivalent level.
The economists predict that the demise of the ethanol tariff barriers will result in a rapid rise of imported ethanol, resulting from incoming Brazilian sugarcane ethanol, since it meets the requirements of advance biofuels. The U.S. has been exporting ethanol to Brazil to meet its domestic needs, but a switch in Brazilian internal policies regarding sugar refining will mean some degree of change. Ironically, FAPRI says the U.S. will continue to export corn-based ethanol to Brazil at a low price, but the U.S. will be buying higher priced Brazilian sugarcane ethanol because it meets the standards of advanced biofuels.
Cellulosic ethanol—made from biomass—will eventually see increased production after 2015-16. However, levels of production will be well below what the federal mandate requires and that mandate will have to be changed to accommodate existing production capacity and the state of technology.
FAPRI’s analysis is based on renewable fuel production that is currently just under 14 billion gallons per year, and expands to more than 22 billion gallons by 2021. However, those additional gallons are comprised only of 3 billion gallons of cellulosic ethanol and 1.2 billion gallons of biodiesel. The FAPRI staff based their conclusions on crude oil prices that average just over $100 per barrel through 2017-18 then fall just below $100 for the remainder of the 10-year projection period. At the end of the period, corn will be supplying 15.8 billion gallons of ethanol, along with 2.3 billion gallons from imported sources, and 3.5 billion from cellulosic sources. Average ethanol prices will remain in the $2 range, generally below $2.30.
Among the sources for cellulosic ethanol, 1 billion gallons will come from corn stover and 2.1 billion from warm season grasses. That will require 19 million tons of corn stover, and 6.5 million acres of grasses. FAPRI’s numbers are based on corn production utilizing about 90 million acres annually, with average yields growing to 182 by 2021, with average annually prices all below $5 per bushel. The impact on US soybean production will allow soybean acreage to float in the 74-75 million acre range, with soybean yields rising to 48 bushels per acre and annual prices averaging in the $11 range.
Changes in federal ethanol policy designed to promote its growth and use will see ethanol only reach a 13 percent national blend by 2021, in part because of the slow growth of advance biofuels, such as from biomass. Interestingly, the promotion of advance biofuels and the elimination of import tariffs will see low-priced corn-based ethanol being exported to Brazil, and high-priced sugarcane-based ethanol being imported from Brazil. The ethanol economy will consume move than five billion bushels of corn per year for the next decade, but corn prices will average in the $4 range based upon ethanol market dynamics.
Source: FarmGate blog