Will Ethanol Production Slow?
Forty percent of the U.S. annual corn production now goes directly into ethanol production. As the world is fully aware, this is a massive number that has changed the face of the world corn and feed grains balance sheets to a degree never before witnessed.
Mandates and subsidies certainly elevated this demand much more rapidly than imagined when the Renewable Fuels Standard (RFS) was first implemented. Ethanol production margins were so big in the early stages of the industry that more plants than anyone had predicted were built and came on line in a very short period of time. That was followed be the global financial collapse in 2008 that sent between 30-40 percent of the ethanol industry into bankruptcy.
The industry has since rationalized itself again and appears on very solid financial ground. In fact, ethanol margins were very good in the last half of 2011. The point is that ethanol production has been setting weekly records the last several months, which means that corn consumption in ethanol has also been setting records. Two important tax items expired at the end of 2011 that have caused some concern about ethanol demand in the future: the blender's tax credit and tariffs on imported ethanol.
Some analysts have called for a slowdown in ethanol production because of the expiration of these protective taxes/tariffs, but there are plenty of reasons to believe that that will not be the case, including the fact that demand for ethanol in the U.S. will remain strong with or without the blender's credit.
(This article was originally published in the 9 January 2012 issue of Ag Perspectives as part of a WPI analysis by Mike Krueger. Click here to find out more about subscribing to Ag Perspectives.)
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