Improved margins could support ethanol production despite the EPA

Market Realist

Why potash companies may be great for value investors (Part 3 of 11)

(Continued from Part 2)

U.S. ethanol

The EIA’s proposal to cut use of ethanol in oil has also negatively impacted corn prices this year. A significant portion of corn is used to produce ethanol, so a cut could negatively affect current or future growth in corn demand.

Cutting back on the forecast

The current proposal, if passed, would translate to about 12.7 billion and 13.2 billion gallons of corn ethanol to be blended with U.S. gasoline supply. Since one corn bushel can be used to create roughly 2.8 gallons of corn-based ethanol, a mid range of 13.0 billion gallons would require roughly 4.64 billion bushels of corn. This is below the 4.9 billion bushels the USDA currently forecasts for the 2013–2014 crop year.

Producers’ margins have improved

But because corn prices have fallen substantially from 2012, ethanol producers’ margins have improved. Potash Corp. (POT) states that it may even be possible that production could still exceed mandated levels. In commodity businesses, there’s a phrase that goes “low price cures low prices.” This means U.S. ethanol production could still hit 2010 and 2011 levels, which would be positive on corn prices.

Long-term factors

Future demand for ethanol will certainly depend on political and economic factors. Requirements and development of fuel with more ethanol are a key component of the long-term growth potential in the market. However, high growth is unlikely, considering that U.S. gasoline use has stagnated and oil production is booming domestically. If U.S. gasoline consumption and oil prices continues to rise, the story would be different.

Continue to Part 4

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