Just as E15 finally cleared federal regulatory hurdles, the confluence of no blender tax credits, high corn prices and widespread drought has put the ethanol market in jeopardy. And questions abound regarding possible government changes to the current Renewable Fuel Standard.

"In light of the economics of the ethanol industry, E15 is at least on hold for now," says Richard Brock, Brock Associates, Milwaukee, Wis. Ethanol industry proponents were optimistic about the outlook for E15 before the drought developed, but any expansion in ethanol production and demand may now be delayed.

“By mid-summer, many plants are showing losses, resulting in several temporarily shutting down. On a positive note, as inventories are drawn down, ethanol prices will start to regain their prices relationships to gas and return some to profitability,”Brock says. “Demand destruction is much harder to recover from than supply destruction." Ethanol plants were losing money even before the drought, he says.

“Ethanol prices fell in late 2011 from the elimination of the 45¢/gal. blender tax credit, according to a May 2012 report from the University of Missouri's Food and Agricultural Policy Research Institute (FAPRI). The 54¢/gal. specific duty on ethanol imports and the $1/gal. biodiesel blender tax credit also expired at the end of 2011.

The Brock Report adds:

“The reduction in production and ethanol stocks prompted a 15¢/gal. boost in ethanol price, from $2.56 the week ending July 13 to $2.71 the week ending July 20 “Iowa State University (ISU)’s estimates indicate $2.62 is needed to cover production costs. The price of DDGs have also been climbing, carrying ethanol producer margins back toward black ink. USDA’s Ag Marketing Service data show Iowa DDGs prices at 101% of corn prices on a per-pound basis vs. 80% of corn a year earlier.

‘Compared with a year ago, the increase in DDGs prices has added 70-75¢/bu. to the value of corn,’ says Bob Wisner, ISU professor emeritus. “Iowa cash corn prices went up by $1.07/bu. during the same period. ‘I am hearing that part of the reason for DDGs prices moving up more than corn is because of tight and expensive soybean meal supplies, because (DDGs) are less expensive than soymeal.”

Ethanol plants “ramped up production prior to the expiration, and the price of ethanol plummeted with the increase in inventory," Brock says. "Only now are supplies coming down enough to increase ethanol prices and allow plants to pay a little more for corn. But the availability of 2012 corn for ethanol use has probably dropped from 5 billion bushels to 4.6 billion or less."
Ethanol production is slowing “as the combination of lower gasoline prices and higher corn prices squeeze margins for both producers and blenders of ethanol," says Darrel Good, University of Illinois ag economist. "USDA's current projected corn use for ethanol production at 5.05 billion bushels is about 0.6 % more than used last year."
Through the first 10 months of the 2011-2012 marketing year, ethanol production was up about 2%. The Renewable Fuel Standard (RFS2) requires a 600-million-gallon (4.5%) increase in renewable biofuel blending in 2013.  However, Good suggests that if margins remain under pressure, part of that requirement could be met with credits associated with excess production in 2011 and 2012 rather than with actual ethanol production. If that occurs, Good agrees corn consumption by ethanol production would fall short of USDA's projection.

And President Obama could close ethanol plants to keep corn available to help feed people, Brock says. "He could invoke executive privilege. It is an election year.”