Saturday, November 2, 2013

The Power of Corn to Lower Gasoline Prices

Lower gasoline prices may be coming from a large supply of corn -- the main ingredient in ethanol -- and there may be some help from debate about the US's ethanol mandate.
5-year corn price history as of September 2013.

The US corn harvest is producing a large bumper crop.  This has caused the corn price to fall to its current three year low.  It does stand to reason that the past several years of high corn price has lead to large corn investments in states like Iowa, Nebraska, Illinois and Kansas. 

From Mario Parker at Bloomberg:
Ethanol futures tumbled for a second day as the government said farmers accelerated the pace of the corn harvest. 
Prices fell 1.6 percent after the Agriculture Department said 59 percent of a record corn crop was collected as of Oct. 27, up from 39 percent the previous week. The grain is the primary ingredient in U.S. ethanol. Production has jumped 15 percent from a record low in January, according the Energy Information Administration. 
“The weather was good and it was a pretty hefty jump in harvest,” said Mike Blackford, a consultant at Intl FCStone in Des Moines, Iowa. 
Denatured ethanol for November delivery fell 3 cents to $1.801 a gallon on the Chicago Board of Trade. Futures are down 18 percent this year. 
Gasoline for November delivery sank 2.11 cents, or 0.8 percent, to $2.6098 a gallon on the New York Mercantile Exchange. The contract covers reformulated gasoline, made to be blended with ethanol before delivery to filling stations. 
Ethanol’s discount to the motor fuel widened by 0.89 cent to 80.88 cents a gallon, the largest differential since Oct. 21.
Despite large harvest, with roughly 40% remaining for harvest, the EPA is considering a cutback in the ethanol mandate -- the Bush era policy requiring certain amounts of ethanol to be blend into gasoline to replace the environmentally hazardous oxygenator methyl tert-butyl ether.  The EPA can scale back mandates due to low supply.  Via Paul Ausick at 247WallSt:
Battered by a host of complaints from refiners and blenders, the U.S. Environmental Protection Agency (EPA) is reported to be considering a reduction to the amount of ethanol required to be blended with gasoline in 2014. If the proposed reduction is adopted, it would be a huge win for oil refiners and a nasty blow to ethanol producers and farmers. 
The Energy Policy Act of 2007 mandates production and blending of 18.15 billion gallons of biofuels in the U.S. motor fuel supply for 2014. Of that total, 14.4 billion gallons must be corn-based ethanol. According to the draft proposal obtained by Bloomberg and not available on the EPA website, the total amount of required renewable biofuels would be cut to 15.21 billion gallons, of which 13 billion gallons would be corn-based ethanol.
The EPA has the authority under the 2007 law to scale back the mandated volumes in certain situations, including inadequate supply or economic hardship. According to the proposal, the EPA claims, “We interpret the term ‘inadequate domestic supply’ as it is used under the general waiver authority to include consideration of factors that affect consumption of renewable fuel.” 
Ethanol is not the only demand for corn.  Livestock depend on corn feed, and food processors depend on high-fructose corn syrup as a sugar substitute, for instance.  However, oil may still be the biggest contributor to the recent decline in gasoline prices.
Past year of WTI oil prices.

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