Ethanol plants to operate at 67 percent through 2010

By Erin Voegele | March 05, 2009
Web exclusive posted April 7, 2009, at 4:00 p.m. CST

Management consulting firm HighQuest Partners LLC is projecting that regulated parties are on track to meet the 2009 and 2010 goals of the Renewable Fuels Standard. Due to reduced ethanol production, however, those goals may be more difficult to meet in 2011.

According to Hunt Stookey, HighQuest Partners' managing director, the U.S. ethanol fleet is expected to operate at approximately 67 percent nameplate capacity through 2010. Although ethanol producers will be manufacturing less ethanol, regulated parties will be able to continue meeting the RFS in 2009 and 2010 through the carryover of Renewable Identification Numbers (RIN) from previous years. "You have to remember that the standard is not how much [ethanol] is produced," said Stookey. "It's for how many RINs."

On March 31 the USDA released its Prospective Planting report, which states that U.S. farmers currently intend to plant 85 million acres of corn in 2009. This is a reduction of approximately 1 percent from the acres planted in 2008. In order to meet the 2011 RFS, Stookey projects that American farmers will need to plant 91 million acres of corn in 2010, which is an increase of approximately 6 million acres over the expected planting for this year.

The industry projections competed by HighQuest Partners are unique in that they assume that the ethanol fleet is doing the demand rationing in the corn market. This means that purchasing behavior of those buying corn for use in the food, feed and export markets is not very responsive to price increases. Ethanol producers are, and tend to utilize the balance of the corn supply. "Evidence for that is fairly strong," said Stookey. "Feed, food and export demand didn't budge during the huge run up in corn prices last year. Through last summer - even with corn at $7.50 a bushel - the number of cattle and chickens and hogs stayed essentially level, and exports were actually up."

This remained true even as the price of corn nearly tripled over two years. "[These markets] just don't respond to the price of corn," he said. "They don't like it, but they don't have any choice."

Although farmers are expected to plant less corn in 2009, Stookey said he expects to see this change in 2010. "What we think is going to happen next year is that obligated parties under the RFS are going to recognize that they are going to have trouble getting enough RINs in 2010," he said. "They are going to start bidding up the price of ethanol, which will bring up the price of corn, which should make corn much more attractive for farmers to plant."

According to Stookey ethanol producers are actually benefiting from the current economic crisis. "They are probably producing a billion more gallons of ethanol this year than they would have if it were not for the crisis," he said. "That is because there is less competing demand for corn for feed."

Since demand for feed is being driven by the economy, an economic recovery would mean there is less corn available for the ethanol industry. Comparatively, a lack of recovery would result in more corn being available for conversion into ethanol. Stookey said that production level of the industry will be driven by how much corn goes into feed, which will be driven by the economy and severity of the recession.

"For the industry I think the long-term economics are actually attractive - meaning they are low risk," he says. "It won't be like in 2005 or 2006, but the plants should be running and making a reasonable profit on a cash basis. But, I don't think it's going to happen until 2011."