By Stu Ellis

When a 10-percent ethanol blend reaches its maximum integration into the U.S. fuel supply, which industry observers call the "blend wall," the market for E-10 will be totally mature and only a significant increase in mileage driven will provide additional revenue opportunities for ethanol refiners and corn farmers. While the motoring public has not indicated it is ready to significantly increase its driving miles, the blend wall will depress profit for the ethanol industry, possibly cause more bankruptcies, and shut the door on cellulosic ethanol. Oooops!

Ethanol is just about at that maximum saturation point in the nation's fuel supply, and that is why the EPA is considering increasing the allowable blend to some percentage above 10-percent. At Iowa State University, biofuels economist Bob Wisner's May newsletter indicates that the benefit of the ethanol tax credit would go to consumers and blenders, not ethanol refiners or corn growers when the blending wall is reached. He says the governmental encouragement of ethanol production is on a collision course with the 10-percent limit for ethanol and that means "birth of the embryonic cellulosic ethanol industry will be greatly at risk."

With the price of gasoline at the $3 mark, ethanol plants should have had some level of profitability with ample supplies of corn that were reasonably priced for refining. But Wisner says ethanol prices indicate the market may be almost saturated or not growing fast enough to absorb the increased capacity. He says that is an indication the blending wall is near. He indicates, "The very large discount of ethanol prices to gasoline has resulted in depressed returns for ethanol plants. Some plants reportedly are now beginning to operate at less than full capacity or have shut down temporarily for maintenance."

Wisner is not looking for a recurrence of the financial crisis suffered by the ethanol industry when oil prices fell without taking corn prices down with it. While the U.S. market is not absorbing additional quantities of ethanol, some US ethanol is being exported to Brazil, where the sugar supply is tight and the ethanol import tax has been removed to allow supplies to enter the country. He is quick to say this is a temporary situation that will be dependent upon weather and sugar crops.

Two other pluses on the horizon, that will help ethanol refiners, will slightly increase the demand. The summer driving season will provide a small boost to the demand. Additionally, California recently increased its ethanol blend from 5.7-percent to 10-percent. On the minus side is the expiration of the 45 cent blenders' tax credit that will expire at the end of the year. Since Congress did not renew the blenders tax credit for biodiesel, those refineries have shut down, and the same might be expected for ethanol refineries.

Looking at the long term, Wisner says expansion of the ethanol market depends heavily on the EPA approval of a higher blending percentage, but he says it will be restricted to vehicles that are 2001 or newer, and that will provide logistics problems for merchandisers and motorists, unless merchandisers just do not offer the higher percentage at all, as is the case with E-85 for all practical purposes.

Wisner says the urgency to expand the blend is being touted by the cellulosic ethanol advocates who need a decision to continue their plans to build production plants. The federal mandates for higher ethanol consumption will not be met, if the EPA does not increase the blending rate, and Wisner says it will take a 20-percent to 25-percent blend of ethanol to meet the federal mandates, unless more flex-fuel vehicles are produced to consume E-85 blends.

Summary:

The ethanol industry is at the blending wall, or close to it, based on the price relationship of ethanol and gasoline, which shows depressed prices for ethanol due to a surplus of production. The EPA is considering increasing the blending rate from 10-percent to a higher level, which will be needed, not only to meet federal mandates for use, but to even give a chance for cellulosic ethanol to reach the market. Without the higher blending rate, the ethanol industry will suffer financial problems with reduced profitability and potential bankruptcies.

Stu Ellis, formerly with University of Illinois Extension, serves as
blogger and editor for The
farm gate
.

SOURCE: University of Illinois.