A plunge in ethanol prices has added to the anxiety in the Corn Belt.
The weekly spot price for ethanol in Iowa fell to $1.27 a gallon in the middle of January from $2.42 at the end of November, according to Scott Irwin, an agricultural economist at the University of Illinois.
“That was the lowest price I have seen since I started tracking ethanol prices in 2007,” Irwin said.
At prices that low, profits have evaporated for ethanol producers. If producers slash output in response to weaker profit margins, they will use less corn and already depressed corn prices could fall even more. More than a third of the nation’s corn supply is used to make ethanol.
Weak corn prices have growers considering planting less of the crop in 2015. As many as 4 million acres could shift to soybeans if corn prices don’t increase in the next two months, Chip Nellinger of Blue Reef Agri-Marketing said on a recent broadcast of the “U.S. Farm Report.”
Corn growers were hoping ethanol production would increase this year after makers of the renewable fuel enjoyed some of the best profit margins in years in 2014. Ethanol helped profits grow 46 percent in Archer Daniels Midland’s corn processing division.
The ethanol industry remains optimistic that domestic consumption could increase in 2015. Cheap gas prices have fueled expectations that consumers will drive more and buy more gas-guzzling SUVs. Chicago-based ADM and other ethanol producers are also encouraging gas stations to sell fuel containing 15 percent ethanol, a product called E15.
Demand for ethanol also has been increasing internationally. Exports grew more than 25 percent last year.
But ethanol profit margins have fallen steadily since the end of November, even crossing into losses last month, Irwin said.
There’s an additional challenge for producers. The Environmental Protection Agency is weighing whether to cut its annual requirement for ethanol blending in gasoline. Under a 2007 law, the 2014 target for ethanol was 14.4 billion gallons and 15 billion gallons in 2015. The law was meant to help reduce dependence on foreign oil and greenhouse gas emissions.
Rolling back the mandate to 13 billion gallons, as the EPA has proposed, would lower food prices, proponents say. But the Renewable Fuels Association and other ethanol supporters counter that lowering the mandate would harm the economy and the environment.
Even without the mandate last year, domestic consumption of ethanol was about 13.6 billion gallons, said Bob Dinneen, chief executive officer of the Renewable Fuels Association. Almost all gasoline sold in the United States contains 10 percent ethanol.
The sharp decline in gas prices last year, though, raised questions about the competitiveness of ethanol. Historically, ethanol has traded at a discount to gasoline, making it profitable for gasoline blenders to use over other petroleum-based octane enhancers.
But starting in mid-November, wholesale gas prices fell below the price of ethanol and stayed that way until the end of January, said Ben Buckner, an analyst at Chicago-based AgResource.
“Ethanol is much less efficient than gasoline,” Buckner said. “For it to be more valuable than gas is rare. Gas moved faster downward than ethanol.”
The unusual situation has led to a more than 20 percent increase in stockpiles of ethanol as gas blenders curbed their use of the renewable fuel. In January, inventories hit more than 20 million barrels, the first time they have crossed that mark since March 2011, according to the U.S. Energy Information Administration.
Excess inventories combined with the overall slide in energy prices have sent ethanol prices tumbling. ADM cautioned Tuesday that ethanol profit margins “should remain challenged until supplies are better aligned with demand.”
ADM’s stock price has slumped 6 percent since the beginning of the year.
Producers are used to ethanol’s volatility. In 2008, prices fell sharply because of the recession, and four years later several ethanol plants closed because the price of corn shot up to more than $8 a bushel, more than double the price of corn futures for March delivery.
Irwin is optimistic that ethanol demand will hold steady from 2014 to 2015 at about 13.5 billion gallons. Consequently, corn use for ethanol should remain at last year’s levels.