Last week when I filled my gas tank E-10 was priced at $2.79, E-30 at 2.66 and E-85 at $2.29 gallon. Not only do we need more blenders pumps in order to break through the E-10 blend wall, but the ethanol has to be priced right. The first criticism of ethanol that you get is lower gas mileage. That is a fact that has to be made up with the cheaper price, so pricing is important. This station priced E-85 competitively to regular unleaded but we have noted instances when E-85 has been priced to generate more retail margin than what it should to be competitive.
If we are going to grow the market for higher fuel blends that will only happen if it is competitively priced. The mid-range E-30 blend is typically the most competitive in terms of fuel mileage and performance. Ironically, Brazil uses an E-27.5 blend as their standard fuel in all vehicles while the petroleum industry claims that vehicles will turn into pumpkins here in the U.S. if any blend over E-10 is used.
The reason why the petroleum industry grudgingly accepts E-10 is that it is the cheapest octane enhancer to meet octane standards. From Big Oil’s point of view any blends above that just cut into their market share. They will make up all kinds of stories foreboding disaster if higher fuel blends are consumed designed to scare consumers away from them. The ethanol industry has been sensitive to the pricing issue and recently has publically identified retailers who have been price gouging on E-85. The RFA studied retail E-85 in the St. Louis area and found some that were pricing E-85 above E-10 which miss-markets the biofuel. The pricing, however, may be dictated by franchising.
The Ethanol Monitor quoted the study, “In a study of the St. Louis retail gasoline market during the summer, the RFA said that E-85 retailers in the St. Louis area may be purposely price gouging Missouri drivers, according to an in-depth study released by the Renewable Fuels Association (RFA). During the 2014 summer driving season, average E-85 prices were 12 percent below gasoline prices at the wholesale level, but 1 percent above gasoline prices at the retail level. Further, the wholesale-to-retail markup on E-85 was nearly twice the markup on gasoline. Finally, the study found E-85 retail prices were roughly $1 per gallon higher than was justified by wholesale prices for locally available ethanol and hydrocarbon blendstock.”
RFA President and CEO, Bob Dinneen, added, “The study concludes it’s fairly obvious that the retailers examined in this study – all of whom are branded by one of the Big Five oil companies – don’t really want to sell E85. In many cases it appears they were pricing E85 above their branded gasoline for the sole purpose of making their gasoline prices look more attractive to the consumer. Sneaky E85 pricing strategies ultimately give oil refiners the opportunity to wrongly claim that consumers are ‘rejecting’ E85, and it gives them an opportunity to claim they can’t comply with Renewable Fuel Standards (RFS) requirements above the so-called ‘blend wall.’ This study exposes the utter hypocrisy of that argument.”
Corn farmers need to be their own best ethanol customers. A corn farmer who doesn’t use higher ethanol blended fuel is like a cotton farmer with a closet full of rayon clothes or microfibers. If a cotton farmer won’t buy cotton why would he expect others to? Any corn farmer who somehow thinks that the ethanol industry is not related to his income is deluded, considering that the ethanol industry processes over three times the amount of corn that will be exported this year.
When I hear a farmer complain about reduced gas mileage from ethanol I ask him if he has noticed that is why it sells for a lower price making it competitive. There is no good excuse for farmers not to consume the product they produce. For a Midwest farm cooperative not to deliver E-85 or biodiesel to the farm that is like the Cotton Association selling synthetic fibers along with a little cotton.
If we could just move the needle of national consumption 1 percent from consuming E-10 to the equivalent of E-11 it would create demand to consume another 500 million bushels of corn. Instead of a 2 billion bushel carryover we would reduce that to 1.5 billion and I believe that the market would respond enough to eliminate ARC/PLC payments so farmers would not depend on taxpayers again.
Would a cotton farmer with a closet full of synthetics really deserve a cotton subsidy? Corn farmers need to wake up to supporting themselves. When I researched biofuel penetration within farm cooperatives, farm fuel distributers, and farmer use of biofuel, it is nowhere near close to the potential of where it can and should be. The entire farm supply chain is half asleep failing to make the connection.
Corn and soybean farmers need to burn bio-diesel and ethanol like a cotton farmer needs to wear cotton. Farmers and farm cooperatives need to become their own best biofuel customers to become the good example for the consuming public to emulate. Just like everyone assumes that cotton farmers wear cotton they assume that corn and soybean farmers use ethanol and bio-diesel. Bio-fuel needs to be priced right and farmers need to be their own best customer.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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