The continued large harvest and late harvest news of a proposed cut in the ethanol mandate have contributed to a new low in corn prices this fall.
Friday, after sharply lower grain prices had already depressed the markets, news hit that the EPA was proposing a cut in what we refer to as the “ethanol mandate.”
This is the amount of ethanol that the government forces the oil industry to blend into gasoline. Although this is still a proposal, it hit the market like law.
Follow-through on Tuesday had corn down an additional dime to a new low of 4.11 1/2. This represents cash corn prices in northeastern Ohio of less than $3.50 per bushel, a critical benchmark.
Soybeans, meanwhile, where 33 cents lower Friday, before a 7-cent rebound Monday. The Friday low was at 12.78, with the Monday low of 12.76 1/2 still well above the harvest low of 12.47 in early November.
The Renewable Fuel Standard, the government’s term for the mandate, is a critical aspect of the market because it forces gasoline blenders to use more ethanol each year — until now.
If this proposal becomes law, the ethanol usage this year will be less to last year, instead of increasing.
Each year since 2007 it has increased, and is one reason that ethanol has gotten close to the 10 percent level in gasoline. However, changes in gasoline usage have given credence to oil company claims that we were hitting the “blending wall.” That is, gasoline consumption had been increasing every year, and was assumed to be going to do that again.
In fact, gasoline consumption domestically has flattened. This is due to a morbid economy that has fewer people driving to work and economically strapped consumers’ driving fewer discretionary miles.
The other key factor is that consumer are embracing new car technology that is yielding higher gas mileage.
Blend wall maxxed
The blend wall currently is the maximum amount of ethanol that can be blended to make 10 percent gasohol, since the E-85 movement has matured.
A couple of years ago the government proposed a level of 15 percent ethanol in gasoline, but that has stalled. Arguments abound that older vehicles cannot tolerate the higher blend.
Also, the delivery systems at local stations are a problem. Does a station owner install a separate pump for E-15, or force the consumer to choose from stations with 10 percent or 15 percent ethanol? Are blender pumps needed, and the cost of millions of dollars? Should the government subsidize the costs of converting?
For these reasons, the E-15 is dead in the water.
The mature ethanol market now is seen to not require more ethanol. Under the proposal, we would blend between 15 and 15.6 billion gallons of ethanol, compared to the 2012 usage of 16.56.
Imagine the effect of this cut on ethanol prices, and on the resulting demand for corn.
Amidst this ugly news is the USDA report that the corn and bean harvests are wrapping up. The U.S. is officially 99 percent done with the corn harvest, 98 percent done soybeans.
North Dakota, Wisconsin, and Michigan are below 80 percent, but most other states are done. Ohio is lagging, at 87 percent on corn, but 100 percent on soybeans.
Northeast Ohio would be an aberration, where we may be 80 percent on corn and there are a few fields of soybeans lying in mud and snow at the moment.
Even with the recent break, soybean prices are respectable. I continue to fear a decline in bean prices, as this price level is a guarantee of maximum South American production.
I can excuse the producer for storing corn. From this level, I would hope we can rally in a normal seasonal pattern, and there is carry in the futures markets to support this idea.
The general structure of the market does not suggest a major corn rally, however.
The first big hope for corn comes in the March Planting Intentions reports. At these price levels, we should see some reduction of corn acres and a gain in bean acres.
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