What's Up with Ethanol Prices?

Posted on April 30, 2014 by Eileen Millett

Ethanol prices appear to be on the rise.  Weather and an increase in exports appear to be responsible for the uptick. The reason for the reported jump in ethanol prices has to do with turbulent winter weather and increasing United States (U.S.) exports, largely to Brazil.  Ethanol has wide usage in both countries.  The Renewable Fuels Association reported that for 2011, the U.S. and Brazil accounted for 87% of the world’s ethanol fuel production.  Some U.S. ethanol plants have stopped production in part because of droughts that have ravaged much of the nation’s crops and pushed commodity prices so high that ethanol has become too expensive to produce. 

Bioethanol produced from fermentation of carbohydrates in sweet and starchy crops like sugar cane and corn,  has gained in popularity as concerns about energy security and rising oil prices have become more acute.  Ethanol fuel, an alcohol derivative, is a renewable motor fuel that is used as a biofuel additive for gasoline.  Most cars in the U.S. today run on blends of up to 10% ethanol.  Today’s typical fuel pump blend, E10, is 10% ethanol and 90% gasoline.  Backed by government subsidies and mandates, ethanol plants rose in the Corn Belt, generating a new market for crops and billions of dollars in revenue for producers of this corn based fuel blend.  Generally, oil companies have opposed using higher concentrations of ethanol, and have tried to get Congress to change federal rules so that we use less ethanol.   

The U.S. EPA (EPA) has not been immune to the ethanol crunch crisis.  Last November, EPA proposed slashing the corn ethanol mandate to 13.01 billion gallons this year, down from 14.4 billion gallon requirement outlined by federal statute.  After already proposing to reduce the corn ethanol mandate, this year, on March 27, in a congressional hearing, U.S. EPA Administrator, Gina McCarthy defended the proposal, citing “infrastructure challenges and the inability at this point to achieve the levels of ethanol that are in the law.”   The U.S. EPA is the agency charged with the responsibility for developing and implementing regulations to ensure that fuel contains a minimum amount of renewable fuel.  Together with many stakeholders, EPA developed the Renewable Fuel Standard (RFS) program, and in 2005, the Energy Policy Act (EPAct) created the first RFS program. The program established the first renewable fuel volume mandate in the United States. 

The RFS program sets forth a phase-in for renewable fuel volumes beginning with 9 billion gallons in 2008 and ending at 36 billion gallons in 2022.  As required under EPAct, the original RFS program (RFS1) required 7.5 billion gallons of renewable- fuel to be blended into gasoline by 2012.  The EPA proposed reduction in the mandate would have significantly affected this year’s corn demand.  In October 2013, the Renewable Fuels Association reported that the proposed 1.4 billion gallon reduction in the ethanol mandate would reduce corn demand by 500 million bushels, and result in a reduction in corn prices.  

However, with the recent rise in corn prices, there is speculation that U.S. EPA could be reversing course.  If U.S. EPA backtracks on its plans there could be more drift in corn prices.  Ethanol prices are not merely dependent on what action U.S. EPA choses to undertake.  On the federal level, the United States Department of Agriculture (USDA) conducts a large amount of research regarding ethanol production in the United States. Much of this research is targeted toward the effect of ethanol production on domestic food markets.  So the oil industry, food companies and livestock sector will all be strong voices to determine what’s up with ethanol prices.  As yet, there is no final rule from U.S. EPA.