A Crack in the Ethanol Dam

Are you ready for life after corn ethanol?

Well, it’s not going to happen just yet, but it looks like it could be playing less of a role in U.S. agriculture than it has during the past decade. For the past few years, ethanol has consumed just about one-third of the annual U.S. corn crop and accounted for about 10% of the country’s gasoline supply.

It’s been a major impetus behind the rising price that farmers have received for their corn crops and most everyone will agree that it has pulled the per-bushel price of soybeans and wheat up with it.

The rising crop prices have led to an almost unprecedented increase in farm equipment sales. The only breather from escalating ag machinery sales came in 2008 and 2009. It’s pretty much been going gangbusters ever since.

All of this hasn’t gone unnoticed by big oil, which has never hidden the fact that it doesn’t like ethanol. Of course, it isn’t just big oil that has expressed concern about the impact ethanol has produced in a variety of ways. Just about 2 years ago, Farm Equipment surveyed ag equipment dealers and nearly half, or 47%, said they didn’t think ethanol was good for the country. When asked if ethanol was good for agriculture, 64% said “yes,” it was good for agriculture.

Last week, after resisting big oil and other industry non-stop pressure to repeal or soften the Renewable Fuel Standards requirements, the Environmental Protection Agency said it could, if it wanted to, roll back the requirements. Published reports say EPA may reduce the 2014 mandate to 15.21 billion gallons of renewable fuel from the 18.15 billion gallon goal set by the 2007 law. At 15.21 billion gallons, only 13 billion would be ethanol. This would be less than 13.8 billion gallons produced this year and well below the 14.4 billion gallons that was originally called for by the law for 2014.

From where I sit, this is the first crack in the proverbial ethanol dam.

After hitting record highs last year of more than $8 a bushel, last week corn prices fell to 3-year lows $4.33 a bushel on the Chicago Board of Trade, the lowest level for futures since August 2010. It appears speculators are betting on a record or near-record U.S. corn harvest this year, as well as the strong possibility of an ethanol rollback next year.

Another factor that not a lot of people have talked about is the fact that last year Brazil surpassed the U.S. as the world’s largest corn exporter, accounting for more than 25% of the total worldwide. Ten years ago, Brazil accounted for only 6% of global corn trade. With its capability of double-cropping and availability of land, Brazil is expected to remain a major player in worldwide agriculture. They’re also currently second in the world in the production of ethanol, just behind you know who.

If you want another look at the ethanol situation check out “How Will Slowing Ethanol Demand Impact Ag Equipment?” in this issue of E-watch. In it, Morningstar analyst Adam Fleck digs into the current state of the ag equipment business and offers his view of near- and long-term prospects for the industry.

He also provides an interesting perspective on ethanol demand. As he points out, there’s no doubt that it’s here to stay, but in all likelihood, it probably won’t be the driving force it has been.