Direction on US ethanol production shows continued modest growth

Direction on US ethanol production shows continued modest growth.

On May 29, 2015 the U.S. Environmental Protection Agency (EPA) announced renewable fuels standards (RFS) for 2014, 2015 and 2016. They also announced biomass-based diesel production volumes for 2017.

So why are production targets important to the Canadian agriculture industry?

First off, they explain the expected demand for renewable fuels in the U.S. This is key because the U.S. has been a net exporter of biofuels recently and U.S. exports influence Canadian profitability. Perhaps more importantly, production targets indicate the demand for grains from ethanol plants and partially drive the pricing patterns of grains (especially corn) for the next marketing year.

The new ethanol target levels call for a 1.47 billion gallon increase in ethanol between 2014 and 2016, to 17.4 billion gallons. First, corn-based ethanol volume is function of the overall biofuel standard minus what is called the advanced biofuels – biofuels that include biodiesel and cellulosic ethanol.  And if this was not complicated enough, each of the advanced biofuel has its own target.

Cellulosic biofuel targets were lowered significantly from the initial law on renewable fuel standards. The minimum targets have been lowered to 33 million gallons in 2014, 106 million gallons in 2015, and 206 million gallons in 2016 from their original targets. The lower targets reflect the difficulties in making this technology profitable in the marketplace.

Biomass-based diesel production targets are 1.63 billion in 2014, 1.7 billion on 2015, 1.8 billion in 2016, and 1.9 billion in 2017. There is also a volume of advanced biofuels that can be met with imports of sugar-based ethanol.  That leaves new production targets for standard corn-based ethanol, which will increase from 1.47 billion gallons to 14.14 billion gallons between 2014 and 2016.

It’s fair to say that some farm organisations were disappointed by the targets because they’re below the levels the Congress originally intended back in 2007. The rationale behind the EPA decision is that the market cannot absorb an ethanol volume that would be more than 10 per cent of the total gasoline usage. This is referred to as the “blend wall”.

The US EPA guidelines for renewable fuels do appear to slow growth in overall demand for corn used in ethanol production in the U.S. This will support the current outlook for corn prices, but will certainly not add any upside or improvement. 

It’s interesting to keep an eye on ethanol export numbers of the U.S. as this will impact the demand for Canadian biofuels. The export outlook of the US industry depends on profitability and the value of the US dollar.  Data from Iowa State University reveal positive profitability for US ethanol plants which suggests a potential to export.

While the new US guidelines don’t offer upside to the grains market, the policy establishes a floor for the demand of corn that can help meet the large supplies expected both sides of the border.

Craig Klemmer, Senior Agricultural Economist