Corn prices pressured by both supply and demand factors
Domestic consumption of ethanol was near 12.9 billion gallons in 2010, 2011, and 2012. Consumption during the first seven months of 2013 was about 100 million gallons larger than during the same period last year. With some expansion in E85 consumption, it appears that the domestic blend wall is expanding slowly and may be as large as 13.2 billion gallons in 2014.
An RFS mandate at or below that level could then be met by physical blending in 2014 and would not require the use of RINs credits. Given policy uncertainties in the future, parties might choose to hold onto RINs and meet the RFS with physical blending, particularly if RINs prices continue to decline.
Depending on the final magnitude of the RFS mandates in 2014, discretionary ethanol blending would likely have to be in the form of higher blends, most likely E85 in the immediate future. The ability to expand E85 consumption would be influenced by blending economics of E85 and the rate of increase in infrastructure required for deploying E85.
If the final rules resemble the leaked rules, ethanol RINs prices will be very low and blending economics for E85 will be determined primarily by the retail price of E10 and the price of ethanol. The price of ethanol is primarily determined by the price of corn. Based on our earlier analysis, the current retail price of E10 near $3.30 would require corn prices near $3.70 to make E85 competitive at the pump on an energy equivalent basis. Persistently low corn prices, then, could motivate an expansion in E85 infrastructure and discretionary blending of ethanol.
Finally, the trade balance for U.S. ethanol will be influenced by the RFS mandate for biodiesel and for total advanced biofuels and the relative economics of meeting the total mandate with Brazilian sugar cane and biodiesel. If the total advanced mandate is only marginally higher than the biodiesel mandate, as rumored, imports of Brazilian ethanol would not likely increase from the relatively low level of this year and the U.S would maintain a positive ethanol trade balance. The size of those imports is important since imported ethanol crowds out domestic ethanol under a blend wall scenario.
A possible reduction in the RFS mandate for renewable biofuels has generally been interpreted as a negative development for corn demand. However, a broader consideration of the potential impacts suggest that corn demand, and therefore prices, in 2014 might be largely unaffected by a reduction.
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