With corn yield estimates declining daily, industries that use corn are concerned about not only the price of the commodity, but also the availability. The elephant in the room is the ethanol industry, which will consume an estimated 4.9 billion bushels of corn in the coming year, regardless whether the U.S. produces 15 billion or 10 billion bushels. But there are an increasing number of asterisks associated with ethanol’s impact on the corn market.
By virtue of the Renewable Fuels Standard, the ethanol industry is mandated to produce enough ethanol so nearly 14 billion gallons can be blended into the U.S. motor fuel supply. And in a year of short corn production, that amount of corn becomes a significant percentage of total production that will result in a negative economic impact for other end users of corn.
The first asterisk refers to the increasing efforts in Washington to move legislation forward that would put the Renewable Fuels Standard on a hiatus so corn would be available for other users. Livestock and environmental groups are among the major supporters of that action. While Iowa State University Ag Economist Bruce Babcock says a shift of 2 billion bushels of corn out of the pipeline to ethanol plants would only have a 28¢ impact on corn, Purdue Ag Economist Chris Hurt says it would be closer to a $2 drop in corn.
Another asterisk is the declining estimate of corn production, which will push prices higher for that commodity as the demand is rationed. Several ethanol plants have closed in the past several weeks as corn prices have increased. Currently, (July 30) corn prices have returned above the $8/bu. mark, well above that level which closed the first ethanol plants and there are concerns others may follow suit. But what is the price of corn that would force closure of the typical ethanol plant? University of Illinois Ag Economist Scott Irwin says, the ‘shutdown’ level of an ethanol plant is simply the point where revenue no longer covers the variable cost of production.” While cost of corn is a major element of the variable cost, Irwin says revenue is the key to the plant continuing operation.
Revenue, of course, depends on ethanol sales, which occur when they are under the price of unleaded gas, and that is a function of the price of crude oil. But when the price of corn pushes variable costs beyond the level of revenue that covers it, Irwin says losses occur, and called that level the “shutdown price.” Are we near that price? Irwin says, “For most of 2012 the shutdown price moved in a fairly narrow range between about $6.50 and $7/bu. In recent weeks the shutdown price has skyrocketed, increasing over $2/bu. to $9.06 last Friday (July 20).” As of the overnight trade on July 30, corn prices were trading between $8 and $8.20. Irwin says the shutdown price has climbed faster than corn prices have climbed, and they will have to go higher before more plants close as a means of rationing the supply of corn. He says in the past six weeks, ethanol prices have climbed more than 32% while corn prices have climbed 27%, so rising ethanol prices have averted the need to shut more plants down due to high corn prices.
As yields and corn production declines, concerns arise about the point at which ethanol plants will be forced to curtail production because of the price of corn reaching unprofitable levels. The shutdown price is a function of the price of corn as well as the price that ethanol is being sold. Currently, the price of ethanol is rising faster than the price of corn, and the shutdown price may be nearly $1 higher than are current corn prices.