Ethanol Gets an Uncertain Boost
Ethanol Gets an Uncertain Boost
President Trump announced recently that he would direct the EPA to craft a regulation that would allow for sales of E15 on a year-round basis. The EPA currently bans the high-ethanol blend during the summer because of concerns that it contributes to smog on hot days, a claim ethanol industry advocates say is unfounded.
While this was lauded as a victory by farm and ethanol lobby interests, the policy move also created strange bedfellows as some environmental groups and the oil industry oppose the new rule and are threatening legal recourse.
Environmental advocates and the oil industry both say the new policy would violate a Clean Air Act provision that limits the volatility of fuels that can be sold. The EPA has concluded numerous times, most recently in 2011, that allowing E15 in the summer—when ozone pollution levels are highest—would violate the law. But, whether the regulation gets lifted and the industry can move forward with year-round E15, it is crucial to understand that there are still important hurdles that lead to expanded ethanol use and therefore a sizable uptick in corn demand.
Let’s look at some of the salient features around this divisive issue:
Keep in mind that E15 has been a fuel option since the EPA approved its use in 2011 for most cars and trucks built after 2001.
They kept this restriction of not allowing summer sales because of its volatility and E15's contribution to smog. But some viewed the “smog-ability” distinction between E10 versus E15 as negligible, and the E15 restriction during the summer was perceived as a technicality. So, opening the door for E15 could mean more “permanence” around building a demand. If the block on E15 sales from June 1 to September 15 is removed, then some retailers might make the added investment to offer it.
This is not an increase in the blend wall.
In other words, expanded use of E15 will have to come from market signals and not from government policies that mandate usage. For that reason, there is no guarantee that you can look at current ethanol production of X and say we will now have 50 percent more production of X.
So what are the economics of moving to E15 and potentially expanding ethanol consumption?
First, fuel retailers could potentially expand profits with the sale of higher blends as ethanol trades at about 75 percent relative to gasoline. Will major retailers be willing to invest in pumps and tanks to market a fuel that is clearly different than the mandated E10 option?
This in turn depends on whether consumers can find an economic edge, too. On the consumer side of the equation, there is research by Iowa State University that shows most drivers require a large financial incentive to switch from E10 to E85. If this result also holds for E15 demand, which would suggest it is implausible that retailers would invest in E15 even with the assurance that they could sell the fuel throughout the year.
The better path to salvation for ethanol and the U.S. corn farmer is probably through the golden gate of exports.
On that front, there have been some good inroads. Ethanol exports have steadily increased in the last few years and have helped support expanded production levels. In 2015, exports accounted for about 6% of domestic production but 2018 that figure now stands at 12 percent. Future growth in ethanol production should be crucially tied to export success.
The U.S. is the world’s largest producer of ethanol, generating nearly 60 percent of the world’s output last year, and the world’s largest exporter of ethanol. U.S. ethanol was shipped to Brazil, China, Canada, India, the United Arab Emirates and nearly 40 other countries last year. Even with China as a non-player in 2018, U.S. ethanol exports are up 25 percent through the first seven months of 2018, which is the most recent data from EIA.
It is tempting to get bullish on the new E15 policy initiative in an environment with such limited positive stimulus, but the real effect will likely be negligible. Nonetheless, ethanol prices that are steeply discounted should foster more international buyers. But that trajectory is a long ground game, and not as easy as flipping a switch at the pump.
Copyright © 2018 FBN BR LLC. All rights Reserved. FBN Market Intelligence is distributed by FBN BR LLC. Contact 877-472-4607 for more information. For the purposes of quality assurance and compliance, phone calls to and from FBN BR LLC may be recorded.
We do not guarantee customers will receive specific benefits or value from participating in FBN BR LLC; results will vary. The data in this article is being supplied as a courtesy by FBN BR LLC. The risk of trading futures and options can be substantial and may not be suitable for all investors. All information, publications, and reports, including this specific material, used and distributed by FBN BR LLC shall be construed as a solicitation. FBN BR LLC does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71. This article contains information obtained from sources believed to be reliable, but its accuracy is not guaranteed by FBN BR LLC. Past performance is not necessarily indicative of future results.
Disclaimer: Futures and Option trading involves substantial risk, and may not be suitable for everyone. Trading should only be done with true risk capital. Past performance, either actual or hypothetical, is not necessarily indicative of future results.