Spend Matters welcomes this guest article by Zulfqar Ali of Mintec.
Ethanol prices in the US have dropped by 38% in the last 12 months, dropping to a 5-year low. Ethanol is an important market for the renewable fuel sector that is controlled by the US and Brazil, which together account for over 80% of global production.
There is a distinct difference in how the 2 nations produce ethanol. In Brazil, the primary feedstock is sugar, while in the US, ethanol is largely derived from corn, with as much as 40% of the annual corn crop being used to produce ethanol.
This reliance on corn is important in understanding why ethanol prices reached a 5-year low in February. Last season, the US had a record corn production of 14.2 billion bushels, due to favorable weather conditions that resulted in an 8% year-on-year increase in yield per acre. Ending stocks are expected to increase by 15% y-o-y to 1.88 billion bushels. This increase in production has led to the price of corn falling y-o-y, which has had a knock on effect to ethanol pricing. US ethanol stocks also increased, up 14% y-o-y to 18.8 million barrels, a 2-year high.
The second key factor in understanding the ethanol market is to consider the gasoline market. In the second half of 2014, crude oil prices fell sharply, which has been widely reported. This led to a drop in gasoline prices, which in January reached their lowest point since 2009. In fact, gasoline prices fell below ethanol prices, leading to reduced demand for ethanol from the fuel industry, adding further downward pressure to ethanol prices.
There is good news for ethanol as demand is somewhat protected by the Environmental Protection Agency mandate, which specifies that a set amount of ethanol must be blended into gasoline. For 2014, 14.4 billion gallons corn-derived ethanol was required to be mixed with gasoline, meaning that at least this level of demand was somewhat guaranteed. However, there are currently ongoing discussions to reduce the mandatory ethanol blending figure or removing this legislation entirely. In any case, this is likely to reduce ethanol demand and may cause prices to fall further in 2015.