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U. S. Ethanol Fortunes In Limbo As E15 Ruling Looms

The U. S. ethanol sector has been on the road to recovery since a calamitous 2008, but the once-soaring industry appears to have hit a plateau amid a glut of supply and a murky demand picture, analysts said at the Reuters Food and Agriculture Summit in Chicago.

Producers are hoping that a government ruling expected this summer to increase ethanol blends will reignite the type of demand growth seen years ago when competing fuel additive MTBE was phased out due to environmental concerns.

But even if the Environmental Protection Agency allows the maximum blend of ethanol in U. S. gasoline to rise to 15 per cent from the current 10 per cent, legal challenges could delay full implementation for months or even years, analysts said.

Meanwhile, U. S. unemployment near 10 per cent and questions about whether an economic recovery will gain traction has held down demand for fuel, leading to a glut of ethanol, they said.

“There’s been some discussion that unless U. S. auto owners start driving more that we are kind of seeing a modest ‘blend wall’ here. I hate to use the term ‘blend’ wall but people are having difficulty getting rid of ethanol here today,” said Dan Basse, president of Chicago-based consultancy AgResource Co.

A blend wall refers to a point where demand growth is stifled unless the blending rate is increased.

“In the last week we’ve seen ethanol prices collapse at the same time that crude oil prices have rallied and our ethanol clients are telling us that they’re having difficulty getting rid of supply,” he said, adding that current average ethanol producer margins are at minus 23 cents a gallon.

Michael Swanson, economist with Wells Fargo, was more optimistic.

“I don’t think the ethanol industry is in that bad of shape and they are going to go where the gasoline goes. I see, with a stronger economy, driving miles starting to expand again and gasoline utilization starting to go back up. That’s all very positive for the ethanol side,” he said.

U. S. law requires that 12 billion gallons of ethanol be blended into the U. S. fuel supply this year. Fuel blenders currently have little incentive to incrementally blend more than that, analysts said.

The law requires a gradual rise in corn-based ethanol use through 2015, but the year-over-year increases are minimal.

A 15 per cent ethanol blend, known as E15, is therefore critical for continued growth of the ethanol industry and a crucial swing factor for corn demand.

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Karl Plume is a reporter for Reuters.

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