The biofuels era: A changing of the guard?
The calculations in Table 3 point to a leveling off of domestic ethanol production at just over 13 billion gallons per year, implying annual corn consumption for ethanol production leveling off at about 4.7 billion bushels, below the recent peak of just over 5.0 billion bushels. The results underscore the importance of the magnitude of the blend wall and the critical importance of the rate at which E-15 is implemented. The calculations also indicate that the inventory of banked RINS (currently estimated at about 2.5 billion gallons) will be exhausted about mid-year 2015.
The biofuel scenario analyzed here has several important market and policy implications. These include:
- Corn consumed for domestic ethanol production will remain at a high, but stable level. As we indicated in an earlier post, the era of rapid growth has likely ended.
- Meeting the RFS for renewable biofuels with ethanol and banked RINS will be very difficult beginning sometime in 2015 if the blend wall is not expanded more rapidly than projected.
- Unless the total RFS is amended, the consumption of biodiesel is likely to expand rapidly beginning in 2014. This was also the subject of an earlier post.
The biofuels era that began in 2006 helped propel corn and other crop prices to a new higher level that has been sustained for nearly six years. One might be tempted to conclude that this new era is coming to an end as corn consumption for ethanol levels out and corn production begins to catch up. Instead, it actually appears that the new era of higher crop prices could be extended well into the future as a result of the RFS for advanced biofuels that in all likelihood can only be met with a rapid expansion in biodiesel production. To gain some perspective on the potential size of this expansion, consider our projection of 3.113 billion gallons of biodiesel production in 2015. This would require about 23.5 billion pounds of feedstock when total consumption of fats and oils in the U.S. currently totals about 28 billion pounds annually. Consumption of tallow and grease, another biodiesel feedstock, is thought to be near 10 billion pounds per year. At the projected level for 2015, biodiesel would account for over 60 percent of fats and oils consumption from all sources. This compares to about 20 percent in in 2012. The new price era, then, would not be extended by rising corn demand, but by rising vegetable oil demand. Whether this scenario actually is realized depends crucially on the evolution of biofuels policy here in the U.S. and energy policies in Brazil. We will be monitoring these issues closely in the future.