Serious doubts about the future of the Renewable Fuel Standard and falling gasoline prices didn’t deter the U.S. ethanol industry in 2014. Ethanol profits were solid, leading many experts to believe the industry is in a position to weather storms in 2015.
While the corn-based ethanol industry is healthy, chances are good the future of the RFS may have reached a crossroads. Speculation about what the U.S. Environmental Protection Agency will do with the RFS in 2015 and debate about potential reform could lead to real-world effects in the ethanol industry.
Corn prices were low enough in 2014 to allow ethanol producers to solidify their long-term positions. One industry expert said the RFS continues to be the backbone of the current E10 market, even with lingering doubts.
“Clearly, the very robust margins from earlier in the year are gone,” Monte Shaw, executive director of the Iowa Renewable Fuels Association, told DTN late last year. “Given the great year, most plants have completely paid off their long-term debt and have a healthy cash reserve. So folks aren’t in panic mode. Corn ethanol is still the world’s cheapest source of fuel octane, and that’s the thing to watch. We have a nearly saturated E10 market in the U.S. I don’t expect that to change one bit. So to maintain current production means we have to maintain current export levels.”
The industry closed 2014 by setting weekly production records in four of the final five weeks of the year, according to the U.S. Energy Information Administration. As U.S. gasoline demand takes its expected historical drop in January and February, Shaw said, ethanol production is likely to back off as well.
The nation’s leading ethanol-producing state Iowa produced 3.9 billion gallons in 2014 at its 43 plants, up from 3.7 billion gallons the previous three years, according to the IRFA.
Brian Milne, energy editor and project manager for DTN’s parent company Schneider Electric, said the RFS was important in sparking industry growth initially but has led to “too much capacity” in the domestic market.
“We didn’t set proper goals,” he said. “We are confronted with a lot of capacity and not able to move in the domestic market. I long felt the industry grew too large in the early heady days after EISA (Energy Independence and Security Act of 2007).”
Ethanol producers with the lowest costs, good relationships with buyers, and plants situated in the right places with the strongest operators, will be “fine over the long term,” Milne said. Exports offer perhaps the best opportunity for corn-ethanol growth. He said it is most likely any market growth will come through exports to the Philippines, Asia and South America.
Milne said he believes oil prices have yet to reach bottom. The price of West Texas Intermediary crude oil closed at $53.61 a barrel on Dec. 29, after peaking at just above $100 midway through the year. Generally speaking, higher oil prices are good for ethanol demand. Even as those prices fall, the RFS will help the ethanol industry weather the storm, he said.
EPA’s delay in issuing the 2014 RFS volumes was based on concerns about whether gasoline retailers had the infrastructure to accommodate expanding ethanol beyond the blend wall. Milne said though the ethanol industry is working to expand the E15 market, progress will continue to be slow.
“I don’t envision higher blends generating a sizeable increase in volume over the next couple of years,” Milne said. “I think E15 will remain minimal, while E85 and other higher blends for flex-fuel vehicles only, will struggle to grow because of unfavorable economics against gasoline. E85 sales are dependent on a favorable price against gasoline.”
DTN Analyst Rick Kment said ethanol prices saw “significant pressure” through December after a strong October, November and early December. The strong prices were driven by a combination of grain harvest and strong demand for train service by the oil industry that challenged ethanol’s move to market. It resulted in “aggressive buying” at coastal areas, Kment said, where higher demand for both export and domestic use created availability concerns.
With U.S. ethanol production growing steadily through the last two months of 2014, he said, increased ethanol availability and falling gasoline prices caused ethanol prices to plummet by more than 70 cents per gallon. Ethanol prices are expected to hover between $1.50 and $1.60 per gallon on the futures market in early 2015.
Strong pressure in RBOB gasoline markets and the entire energy complex has created concerns about strong ethanol price support over the next year, Kment said. Gasoline prices have fallen by nearly $1.25 per gallon in the final quarter of 2014, with additional pressure developing at the end of the year.
Corn prices are expected to remain in the current range early in 2015, Kment said. That will stimulate strong ethanol production at current profit margins. “But the stable corn prices and lower ethanol prices are likely to erode margins further through the first quarter to half of 2015,” he said.
Darrel Good, professor emeritus in the department of agricultural and consumer economics at the University of Illinois at Urbana-Champaign, said in a Dec. 29 analysis that corn prices are expected to rise in 2015.
“The record 2014 crop and lower prices are expected to result in only a small increase in total consumption during the 2014-15 marketing year,” he said in the analysis. “Early expectations were for year-ending stocks to be at a 10-year high of 2 billion bushels. Some reduction in U.S corn acreage in 2015, coupled with a return to a trend yield, would result in a much smaller crop and a reduction in stocks during the 2015-16 marketing year.
“After averaging close to $3.50 during the 2014-15 marketing year, corn prices are expected to rebound to the low- to mid-$4 level next year if production declines as expected.”
DTN’s hypothetical ethanol plant model showed net profits of about 14 cents per gallon on Dec. 29. This is a 74-cent drop in profitability from late November when even lower corn prices and tight supply of ethanol led to aggressive margins.
Near the end of 2014, the EPA announced it would release RFS volumes for 2014, 2015 and 2016 — all in 2015. Kment said ethanol prices likely will remain sensitive to expected EPA announcements on the RFS.
“Currently, most producers and blenders need to move forward as if the future moves are similar to present situations when concerning blending regulations,” he said. “But the ethanol market will likely become more susceptible to announcements, or expected announcements by the EPA, which could heavily influence short-term price shifts in the market.”
While the RFS grabs all the headlines, Kment said ongoing transportation difficulties could press the ethanol market.
“Two strong spikes in prices, one in early spring and one in late fall, were both driven by concerns of getting ethanol to end-user locations based on congestion of the rail system and inability to move trains in a timely manner,” he said. “This has the potential to be a major factor through the upcoming year, and could create significant price volatility at that time.”