When ethanol subsidy ends

[Jim Meade / Iowa City]

Where do you think corn will end up when the money savers go to Washington and look for places to cut the budget - and see ethanol subsidies in their headlights?

Will down 35 cents hold it or will we lose more?  How will you hedge?  Buy selling now?  Selling the board?  Buying puts?

[GoredHusker]

Wow, that's a very good question.  I think we first have to look at what we do know.  Soydiesel subsidies ended last year.  From what I've read, the industry has run at 21% capacity in 2010.  I'd venture to guess we'll see something similar to that in ethanol which would be a lot more devastating than 35 cents.  I think we all have to honest here.  The blenders credit/import tariff will not be extended in the lame duck session.  This means it will expire as planned.  The new faces don't enter until towards the end of January, so it will be at least Feb. before anything gets passed.  I'd be willing to bet we'll go through at least 3-4 months without the blenders credit.  While they'll promise to pass it and claim it will be retro., no blenders will blend anything more than the mandates because it was the same story they heard with soybdiesel this year.  This means, we're in jeapardy of losing 20% before anything happens.  I might very well be wrong, but I believe it would be extremely foolish to hold cash grain through the first of the year.  I don't trust our gov't any farther than I can throw it, and I trust China's even less.

[wehav]

If correct, the ethanol use of corn is 30%.  Would that translate into a huge surplus of corn for years?

[kraft-t]

I think there is too much political support to drop ethanol subsidies. Not only for the corn producing states but also from the environmental alternative fuel crowd.  They may not like the spending but they do want alternatives to fossil fuels.

[Jim Meade / Iowa City]

Ethanol uses somewhere around 4.5 billion bushels.  About 1/3 of that comes back as DDG to feed, doesn't it?  So DDG that was fed here or exported would still produce a demand on the corn market.  Maybe 1.5 billion bushel?  And lower prices might bring some increase in feed use and exports so to pick a number out of the air maybe of the 4.5 billion bushel we lose only half of it.  Of the half we use, at least this year, 1/2 (about 1.2 billion) could go back into the pipeline.  That leaves 1.2 billion (give or take a large margin) to be consumed.

It does sound like that would be more than a 35 cent drag on the market.  Maybe a buck?  I have no idea.

[Blacksandfarmer]

Jim my question would be how much subsudy money is given to oil companies relitive to ethanol companies? If the oil companies get more money the National Corn Growers should have a field day with that.

[SD Wild/OBG]

One of the several reasons a person can't compare ethanol to biodiesel is the oxygenate angle. If ethanol is dropped, then MTBE must get reintroduced. (unless we operate without an oxygenate.) To restart the shuttered MTBE production would take years of permitting. MTBE isn't something we can import either.

So even without any subsidy at all, the ethanol is destined to get burned. Sure the high cost ethanol producers would shut down, but that would simply send the priceof ethanol into a massive bull market. The spread between ethanol and unleaded would widen for awhile as the consumer would choose unleaded until it was scarce. But then the lack of MTBE productive capacity would mean rationing of straight unleaded supply.

[vrbuck]

i'm with you on that wildman and the plants are already built.  Once build that don't come down easily and somone will own them.

[Mark, ncIA]

OBG,

The oxygenate market angle is a good one, & MTBE won't come back regardless of legality due to liability issues.  The biggest thing going for ethanol, other than the blenders credit, is the RFS.  For 2011 it appears we'd produce in excess of the RFS about a half a billion gallons.  Take away the blenders credit & inefficient or outside the corn belt plants will have to idle or shut down that amount minus exports. (could loose up to 200 million bu of corn demand without the credits)

Exports of ethanol are becoming a bigger slice of the pie every day.  Couple of reasons, sugar prices & demand, whether gov't contrived or mkt based.  Canada & Mx have been taking a pretty big bite, with Europe buying enough there's rumblings from there of import duties.  So, maybe we export our way around your defacto corn export ban by shipping co-products?  Or at a minimum maintain corn demand through those means?

Mark

[rayjenkins]

FAPRI analysis on various outcomes...

leaving mandate in place and dropping tax credit has little effect ---although I would expect some short term anxiety while things sort themselves out...

http://www.fapri.missouri.edu/outreach/publications/2009/FAPRI_MU_Report_04_09.pdf