INSIGHT: US ethanol industry faces high costs, loss of tax credit

28 November 2012 19:56  [Source: ICIS news]

HOUSTON (ICIS)--The US ethanol market will contend with several challenges in the upcoming months, from the expiration of a key tax credit to a drought-devastated corn crop and high feedstock costs.

For the next year, many say the ethanol industry will operate in an environment of thin margins.

The US Department of Agriculture (USDA) estimated this year’s corn harvest to be about 10.7bn bushels, down 13% year on year.

The USDA also estimated that the carryover from this year’s harvest will be the lowest ever, down 35% at 647m bushels.

As a result, corn prices have been on the rise. They settled up 12.6 cents/bushel at $7.602/bushel on 27 November.

About 40% of corn grown in the US is used for ethanol. But that number could decrease in the near future.

Because of the outlook for ethanol, many producers have idled plants and cut production rates. Already, Valero has idled two of its 10 ethanol plants because of low margins.

In all, production at ethanol plants plunged 14.0% year on year for the week ending 23 November, according to the US Energy Information Administration (EIA).

Ethanol stocks, on the other hand, are up 7.6% year on year, the EIA said.

Many buyers still have ample reserves, left over from when producers flooded the market with ethanol to take advantage of a federal tax credit.

The tax credit expired on 1 January, after more than 30 years in existence. Since producers have severely curtailed ethanol production, many have turned to imports to make up the slack.

In fact, the US, for the first time in three years, became a net importer of ethanol, according to the EIA.

On average the US imported 21,000 more bbl/day of ethanol than it exported in August. It was the first time the US imported more ethanol than it exported since December 2009, when the country had a trade balance of zero, the EIA said.

Since then, the US gradually exported more ethanol until the end of 2011, when the US exported 97,000 bbl/day more than it imported.

Brazil was the primary source of ethanol imports, sending an average of 56,000 bbl/day of ethanol to the US.

Meanwhile, Canada was the primary destination for ethanol exports, receiving an average of 28,000 bbl/day.

The EPA’s recent rejection of a waiver to the Renewable Fuel Standard (RFS) means US refiners must blend 13.2bn gal (50.0bn litres) of renewable fuel into gasoline this year. Next year, the amount increases to 13.8bn gal.

Several governors and industry group came together earlier this year to ask the EPA to waive the RFS.

They contend that this year’s drought has brought economic hardship to the agriculture, particularly livestock, industry, as a result of record-high corn prices.

The EPA said it worked with the USDA and US Department of Energy (DOE) to analyse economic data and make a decision on the waiver.

Waiving the mandate would only reduce corn prices by about 1%, the EPA concluded, adding the waiver would have no affect on household energy costs.

Daniel Flynn, an energy analyst with the Price Futures Group, said the US will never become energy independent with policies like the RFS.

“We need a mandate that makes sense,” he said. “We need to quit focusing on ethanol and look at our abundance of natural gas. Let’s use that, export it and create jobs.”

However, an ethanol broker had a different viewpoint.

“If they had accepted the waiver request it would have been a major setback for producers,” the broker said. “They would have been saddled with a ton of extra supply. The market is illiquid enough as it is already. I think they averted a deeper crisis in the market by denying the request.”

By: Bobbie Clark
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