Iowa economists: 2014 ethanol prices drop to 58% of retail gas

By Susanne Retka Schill | April 14, 2014

The continuing shifting relationships between ethanol, corn and gasoline are the subject of two analyses done by Iowa agricultural economists for the AgMarketing Resource Center newsletter.

Don Hofstrand takes a look at the increase in corn production cost and how the saturation of the ethanol market may impact the profitability of the ethanol supply chain, and how these profits may be distributed between corn farmer and ethanol producer.

Robert Wisner examines the question of the changing relationships among ethanol, gasoline, crude oil and corn prices.  “Corn supplies, barring another period of adverse weather, appear ample for both feed and fuel needs for the next few years if the corn-starch ethanol industry capacity remains near the current level,” he writes.

In a series of charts, Wisner compares corn prices to crude oil since 2003 as well as gasoline, diesel and jet fuel prices versus crude prices.  In the case of gasoline and ethanol prices, the higher cost of transporting ethanol by rail or truck compared to pipeline for gasoline has widened the spread between the two. “Also, as supplies increased, ethanol prices tended to more fully reflect ethanol’s lower energy content than gasoline.  The energy content of ethanol is about two-thirds that of gasoline, although part of the value difference is offset by ethanol’s higher octane content and the ability of refiners to produce cheaper low-octane gasoline and upgrade the octane level with ethanol.  In early 2006, ethanol prices were about 80 percent of the price of gasoline.  By early 2014, with the domestic ethanol market nearly saturated, ethanol prices at Iowa plants were about 58 percent of retail gasoline prices.”

While serious rail transportation impediments have moved wholesale ethanol prices higher, he continued, that is expected to be temporary. “Whether ethanol prices will weaken relative to gasoline in the next few years will depend heavily on whether the domestic market can be expanded beyond the current blend-wall saturation level.”

Hofstrand refers to an analysis for a hypothetical Iowa corn farmer looking at revenue, costs and net returns since 2000. While corn prices have shown significant volatility, product costs have gone up at an increasing rate over this time, and essentially doubled since 2000. “The trend has been relatively stable except for 2009 where cost increased substantially but then fell back in 2010.  Seed, fertilizer, diesel fuel, machinery repairs, etc. have all increased substantially over the 15 year period.  Only herbicide cost has bucked the trend,” Hofstrand writes.

In his discussion of the historical trends and projections for the future, Hofstrand adds that if lagging ethanol demand “cannot continue to mop up excess corn supplies, corn prices may drop below the cost of production.  If this happens, there will be considerable downward pressure on production costs.”

Hofstrand also briefly reviews the potential for ethanol prices to weaken relative to gasoline. “With the expected emergence of cellulosic ethanol production and increasing government mandates for its use, shrinkage of the corn starch ethanol market is an additional factor that may affect total returns and profits shown here.”