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By Staff | Feb 19, 2016

Blenders now use ethanol for two reasons – the market calls for it as a cheap source of octane and the RFS keeps retail petroleum distributers from blocking its consumption.

The Renewable Fuels Standard does mandate the use of ethanol, but to this point the mandate has been set below actual usage so that all the ethanol used was called for by the market.

The mandate has not forced more ethanol into the market than what the market wanted on its own. The market was choosing the winner being ethanol.

What the mandate did in the background is prevent the petroleum industry from appointing itself the winner as it controls retail distribution and could otherwise deny access to ethanol for consumers.

The RFS has functioned as an anti-trust provision preventing predatory practices by the petroleum industry to the limits set in the RFS.

The financial health of differing companies within the ethanol industry varies widely right now from those still paying dividends to investors to others being offered for sale to another likely filing for bankruptcy.

I just got a very nice dividend check that I was not expecting from Little Sioux Corn Processors. Ethanol margins are down to the point where they are covering operating costs, but little else. Plants that have little/no debt are still paying the bills.

There are a lot of bad moves in the ethanol industry. Abengoa reportedly owes more than $9.1 million for corn to CHS, The Andersons, Gavilon Grain and the Nebraska Farmers Co-op that it can’t pay.

The Spanish-based company is reportedly looking for a buyer, but the U.S.-based suppliers want paid fearing they may get left out given a sale. They would reportedly prefer an Abengoa Chapter 7 bankruptcy.

Abengoa has one of the three commercial cellulosic plants to start up last year which may have been the hole in the bottom of the bucket that drained its operating cash. Commercial cellulosic ethanol production is a work in progress.

One of the industries founding companies, ADM, is reportedly looking to sell three of its plants totaling half of its ethanol production capacity. ADM is complaining about low margins and it appears to have lost confidence in the long pull of the industry saying it is evaluating options.

What ADM is evaluating is, in part, the longer term price outlook for crude oil. If crude oil stays this low or lower for a protracted period of time that means ethanol competitiveness will be severely challenged at some point.

Spot ethanol was trading 45 cents per gallon above spot unleaded as of this writing. (1.42 versus 0.97 per gallon) How long can such a premium be sustained?

What price does corn have to be in order to compete with crude oil as ethanol? I could argue that corn is going to go toward that price.

I promoted an Ethanol Plan E marketing strategy where the profitability from ethanol investments was supposed to offset periods of low corn prices for corn farmers.

When corn prices were high, corn farmers made money from corn and when corn prices were low they made money from ethanol investments. That was the premise. It has been working for the most part. As I noted, I just got another ethanol dividend. But I am not holding my breath for more.

Extremely low oil prices generated in part by the Saudis wanting to shut down the competition was something that I had not counted on. It is not only Iran, Russia and shale oil producers that they would like to close down, but they would like to bankrupt a few biofuels producers, too.

It has become apparent that under this scenario we can lose money on corn and not get paid for ethanol investments either. While the RFS has served in the background as an anti-trust provision to ensure market access for ethanol from the petroleum industry-dominated retail fuel distribution system, it could become more than that.

The RFS sets a floor under ethanol consumption although the worst case scenario for that includes use of RINs.

One ace in the hole for ethanol is its role as an octane additive in gasoline. In order to meet octane requirements in gasoline, refiners have to add aromatics such as benzene, toluene, or xylene in order to raise the octane level, or use ethanol, which accomplishes the same thing at what has been a cheaper price.

Ethanol is not in a position to compete with 97-cent gallon gasoline, but is the cheapest form of octane.

Ethanol is still the most competitive aromatic. That can support use of ethanol at a higher price than gasoline as an octane additive at the 10 percent blend level so that should be the floor. Unfortunately that is not the blend rate that the corn market needs.

Save the date: Commstock’s Winter Ag Outlook meetings, “Running the Gauntlet, The Ag Sector’s Epic Hunger Games,” are now scheduled.

They feature David Kruse, CommStock president; and Dr. Elwynn Taylor, Iowa State University’s climatologist.

The seminars begin with registration at 8:30 a.m., and the speakers to begin at 9 a.m.

The event should conclude by 12:30 p.m.

The cost is $60 if registered/paid a week in advance of each event, or $90 at the door.

The events are:

  • Feb. 19: at the BARC Center in Windom, Minnesota.
  • Feb. 26 at Iowa Wesleyan, in Mount Pleasant.
  • March 18 at the Holiday Inn Conference Center, in Ames.

Once again, we are partnering with the Iowa Corn Growers Association and Farm Credit Services to bring you these seminars.

To pre-register or for more information contact (800) 242-5014.

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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