Poor Corn Crop Will Have Major Impact on Ethanol Market

I have long felt that one of the biggest threats to the U.S. ethanol industry is a major drought/crop failure in the heart of corn country. This year we may be experiencing such an event. Recent reports indicate that what had been expected to be a record crop of corn has been downgraded such that only 40% of the corn crop is being classified as in good or excellent condition. This is down 48% versus last week and 69% versus a year ago.

Corn prices are naturally surging in response; current corn prices are 21% higher than they were a year ago. Because so much of the corn crop is devoted to meeting ethanol mandates, there is a potential supply conflict being set up between food producers and ethanol producers.

This was always the risk in my mind; that a major drought could reduce the corn crop and result in surging fuel and food prices at the same time. This creates a situation that politicians who are not friendly to the ethanol industry will likely exploit. It won’t likely lead to an end to the mandates, but support for a 15% ethanol mandate (E15) — something the industry desperately wants — will likely erode in the face of the weak corn crop.

As you might expect, ethanol prices are moving higher, but I don’t think the price fully reflects the situation with the corn crop. It has been clear for at least two weeks that ethanol prices should move up in response, but the response has been slow and is just now gaining momentum. Normally, one would expect demand to fall in response to higher prices, and for that to mitigate the price rise, but gasoline blenders do not have the option of reducing their ethanol usage because of the mandate in place.

Thus, it appears that there is a short term opportunity in the ethanol market brought about by the corn shortfall. Longer term, there is a distinct risk for the growth of the industry as E85 prices become less competitive, and gasoline prices potentially rise because blenders are being forced to blend higher-priced ethanol. The MPG adjusted fuel price for E85 has now risen to above $4.00 a gallon, which is 50 cents higher than the price of midgrade gasoline.

The bottom line is that the short-term market for ethanol futures is bullish, but the longer-term market may become extremely bearish if politicians are successful in using the current situation to soften future support for ethanol.

(EDIT: As we go to press, the U.S. Dept. of Agriculture (USDA) confirmed this report by lowering their projected corn yield by 20 million bushels, a 12% reduction.)

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10 Comments on "Poor Corn Crop Will Have Major Impact on Ethanol Market"

oilforbreakfast on Tue, 17th Jul 2012 11:04 pm 



The Ethanol madate is one of the sillier responses to the fossil fuel crisis. The actual EROI (Energy Returned On Invested) is barely above 1 to 1. Meanwhile because of the mandate, the price of food will go up as corn is diverted to fuel from human and animal food.

Did I say silly? Tragic is more like. People may indeed starve to death because of it when the US is unable to make its foreign food aid donations.

What an irony: Fossil fuels causing climate change causing drought causing a shortage of corn made worse by the mandate that the corn be used to offset the damage caused by fossil fuels!

Kenz300 on Wed, 18th Jul 2012 12:51 am 



Second generation biofuels made from algae, cellulose and waste make more sense than using corn.

We can now make biofuels from waste or trash. Every landfill can now be converted to produce biofuels, energy and recycled raw materials for new products. Productive use of waste or trash is more sustainable than putting it in a landfill. Since the raw materials are already being collected the inputs to the process should be inexpensive.

BillT on Wed, 18th Jul 2012 1:17 am 



Kenz, there will be no ‘second generation’ biofuels. They are net losers of energy NOT net gains. It is rapidly becoming obvious to even the most ignorant cornucopian that it is NOT going to happen. Ever!

Something that works marginally in the lab may not be scalable to real life. As can be seen from the corn crop failure, nothing is for certain except death. The corn belt could turn into a dust bowl and biofuels will crash and burn… pun intended.

SOS on Wed, 18th Jul 2012 1:48 am 



Ethanol is a big business providing a more vital corn market and a lot of jobs. Its not the answer to our fuel problems but it helps.

This author is pragmatic and has offered an opportunity in ethanol to those listening.

Misinterpreting cause and affect is causing a strange type of politics that is fullfilling the prophecy of peak oil. Climate may be changing, your guess is as good as the well funded studies, but fossil fuels have little to do with it.

The enormous supples of recoverable oil in North Dakota and surrounding regions is little-by-little starting to sink into peoples heads. These supplies are eclipsing mid-east reserves. This is technology at work for a better future for all.

Politics is a big drag and costing everyone a lot of money. We need a government that supports and promotes energy while enforcing regulation rather than a government the uses regulation to punish industry and restrict supply.

Why would they do that? Peak politics = peak oil.

SOS on Wed, 18th Jul 2012 1:53 am 



Today I spent about 4 hours on gravel roads in the heart of corn country. Cobs are about 1/3 – 1/2 developed. Mostly the crop looks good. Its between 5 – 7 feet tall. It could use some moisture but in our area there is no crop failure dead ahead.

This crop will yield even without more rain. One more decent rain will assure an adequate yield.

DMyers on Wed, 18th Jul 2012 2:38 am 



Let an old man take you back to how some of this started. It was the 1970’s and we had the oil shock. Energy prices went through the roof and took everything else with them, even wages, back at that time. The ethanol transfusion was such a wonderful welcome solution. It was bone tossed to the public to assuage the pain of gas shortages and price spikes. That’s what it’s been ever since, just a sort of ad gimmick, a sign that we’re doing something.

When it comes down to choosing between oil and food, that is a quintessential dilemma. Life or lifestyle?

DC on Wed, 18th Jul 2012 3:26 am 



All I can to this is…

GOOD!

Bio-fools is a disaster all around. At best, it can be used in very local niche applications, like helping power farm equipment! But thats it. Anything beyond a very narrow circle of applications is a net loser, for everyone. Taxpayers, the enviroment, people that like food, everyone. Another agri-crop corporate welfare scheme that will never do what its proponents claim it can, or at least, imply it can.

That is to say, save Wall-mark, disney-land, suburbia and the whole Wall ST dervitive scam. Wont Not going to happen, unless amerika finds a fertile un-inhabited land mass the same size as amerika, with lots of mexicans handily nearby and govt 10xs the size of the current one in washington to help subsidize it all. Oyea, and though in a few Saudi Arabias for the fossil-fuel to power the whole scheme…

BillT on Wed, 18th Jul 2012 3:56 am 



SOS and Kenz like to dream that it will all go on as before, when it is obviously crashing around them. They cannot seem to separate fact from the fiction/lies fed to them by Big Ag and Big Oil/Gas. Bio-fuels exist ONLY because the government is propping them up. Ditto the gas bubble and the shale oil scam. When that ceases, and it will soon, then they will see the folly of their ‘plans’.

ALL of these sources were known decades ago, but we were not so desperate as to try to implement them. Now we are like a dying man digging to find water with his last once of strength and failing. There is nothing new under the sun…only dreams. Adjust!

BillT on Wed, 18th Jul 2012 5:58 am 



BTW: SOS, if you drove for 4 hours at 40 mph on those gravel roads and you saw 1,200 ft of corn on each side, all the way. you saw about 1/2000th of the US corn crop. And even you said with out rain that too would fail. My sister in PA said they are cutting the corn for silage instead of grain this year because it is not worth harvesting.

george on Wed, 18th Jul 2012 12:44 pm 



lmao @ enormous north dakota oil fields