The ethanol industry is facing some significant challenges this year. High corn prices have significantly reduced ethanol production margins and some plants have shut down. Production, which some weeks last summer was running at a 14 billion gallon annualized rate, is now down to around a 12 billion gallon rate. Revenue over variable costs are running at about 5 to 8 cents per gallon compared to about 25 cents per gallon before the drought hit in June.

The ethanol blending mandate for 2013 is 13.8 billion gallons. Unless economics change, the industry will not produce 13.8 billion gallons of ethanol this year, so how will the industry meet the mandate? It is important to remember that the mandate is on a calendar year basis so it doesn’t exactly coincide with the crop year corn-used-for-ethanol forecasts.

The current USDA forecast for corn used for ethanol for 2012/13 is 4.5 billion bushels, suggesting ethanol production of about 12.5 billion gallons of ethanol. However, if corn yields this year return to near trend levels, corn prices will decline in the second half of the year and ethanol profit margins and production may increase. But production probably won’t exceed 13 billion gallons, even under optimistic price and profit assumptions.

In addition, we still export some ethanol, with exports in recent months averaging about 50 million gallons. So, let’s assume that we produce 13 billion gallons and export 500 million gallons in 2013 which would leave about 12.5 billion gallons for domestic blending. That is 1.3 billion gallons less than the mandate. But blenders can meet the mandate by turning in RINs that were saved when blending exceeded the mandated levels in previous years.

It is believed that RINs totaling about 2.5 billion gallons were carried over into 2013. So, the industry could meet the mandate with 12.5 billion gallons of actual ethanol and 1.3 billion gallons worth of RINs.

Because the industry can use carryover RINs to meet the 2013 mandate, that might get us through 2013, but what happens in 2014? A serious problem in 2014 will be the “blend wall”. Unless sales of E-15 or E-85 really take off, ethanol use can only total about 10 percent of gasoline use. And gasoline use is currently running at about 134 billion gallons per year. That suggests use of around 13.4 billion gallons of ethanol, but the mandate rises to 14.4 billion gallons in 2014. Unless the mandates are changed, the industry will need to use RINs in 2014 to meet the mandate above the amount of ethanol that can actually be used. Then the problem gets worse in 2015 with the mandate up to 15 billion gallons.

There are efforts in Congress to eliminate the Renewable Fuels Standard (RFS) mandates altogether, but the success of these efforts is doubtful. However, there are real challenges facing the ethanol industry over the next couple of years if things don’t change. Ethanol production may rebound next year and the year after if prices and profits are favorable, but it is not clear how we can use a lot more ethanol unless something is done about the blend wall.