Corn analyst keeps cool on ethanol production cuts

by World Grain Staff
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KANSAS CITY, MISSOURI, U.S. — Declines in corn futures prices on Nov. 28 in part reflected bearishness toward ethanol prices, which have been affected by a decline of about 35% in crude oil futures since late May. On the last trading day of November, crude oil futures tumbled more than $7 to five-year lows near $66 a barrel on news the Organization of Petroleum Exporting Countries (OPEC) was not cutting crude production despite lower prices and ample global supplies.

“If crude values drop, you’re going to see ethanol drop,” said Karl Setzer, market analyst at MaxYield Cooperative in West Bend, Iowa, U.S.

While some experts contend crude oil futures were technically oversold at about $66 a barrel, they acknowledged prices could continue eroding toward $60 a barrel, the next support level, if world supplies continued to grow. That scenario was not considered unlikely, given that OPEC wants to make U.S. shale oil production uneconomic by pressuring crude oil prices further, they said.

Setzer noted that, in Iowa, which dedicates about 40% of its corn crop to ethanol production, the price spread between blended gasoline with 15% ethanol, known as E85, and unblended gasoline has narrowed to about 10¢ a gallon, down from spreads of 30¢ to 50¢ a gallon earlier this year. He said consumers in the state increasingly may opt to pay modestly higher prices for unblended gasoline, which operates more efficiently in cars than E85.

“The trickle-down effect of cheaper gasoline is lower ethanol usage,” Setzer said. If ethanol margins decline, ethanol plants won’t be willing to pay as much for corn, he added, which may hurt Iowa farmers’ bottom line.

He said agricultural commodities as an entire investment category, including corn and soybean futures, may suffer as speculative investors on the wrong side of a falling energy market may need to liquidate long positions in other types of investments. While corn futures only fell about 3¢ a bushel on Nov. 28, soybean prices tumbled about 30¢ a bushel and soybean oil, a major raw material used to produce biodiesel, plunged about 1.3¢ a lb on the CME Group. World sugar futures prices in New York fell as much as 0.5¢ a lb Friday on the OPEC news. Brazil, the world’s largest sugar producer, converts about 55% of its sugar cane into ethanol.

Despite this seemingly broad swathe of bearish fundamentals developing from the downward trajectory in crude oil prices, Setzer remained restrained in his predictions relating to corn ethanol production in Iowa. He said ethanol margins would have to remain tight (or negative, which rarely happens) and crude oil futures low for a period of months before major changes in the corn ethanol business model would be contemplated.

Setzer argued that farmers were not likely to significantly reduce their 2015 corn plantings from current levels because of changes in ethanol pricing. He said ethanol plants would remain up and running and that ethanol mandates weren’t likely to change much in the coming year. He also noted that E85 wasn’t the only blending formula available — “E10, E20 or E30 is a possibility as well,” he said.

The U.S. Environmental Protection Agency recently said it will not report 2014 applicable standards under the Renewable Fuels Standard before the end of the calendar year, so there was no way of knowing yet whether the “food versus fuel” debate would be resolved in favor of fewer corn bushels going into ethanol production. With the price of corn futures well below $4 a bushel, ideas that values were being artificially skewed higher may be losing momentum.

Iowa farmers have an especially strong vested interest in the continued blending of ethanol into gasoline, since Iowa was expected to convert more than 950 million bushels of corn to ethanol in 2014, about 40% of the crop from the nation’s largest corn growing state. The U.S. Department of Agriculture forecast Iowa corn production at 2.416 billion bushels in its November Crop Production report.

The USDA in November forecast corn used for ethanol in the entire United States during the current 2014-15 marketing year at 5.15 billion bushels, up 25 million bushels from its October forecast and equal to about 36% of total U.S. 2014 corn production, estimated at a record 14.407 billion bushels.



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