FAPRI report assumes VEETC isn't renewed, ethanol production dips

By Holly Jessen | March 09, 2011

A report presented to legislators March 7 assumed that the blender’s credit would expire at the end of 2011, resulting in a decrease in ethanol production. In previous years the annual Missouri Food and Agricultural Policy Research Institute (MU FAPRI) report has assumed the tax credit would be extended, however, the assumption was changed this year to match what was assumed by the Congressional Budget Office.

With the expiration of the tax credit FAPRI’s baseline projects ethanol production to go from 13.6 million gallons in the 2010-’11 marketing year (measured from September to August) to 12.9 million gallons in 2011-’12. Production then climbs back up to 13.5 million gallons the next year, after which it continues to increase slowly to 18.4 million gallons in 2020-’21. The growth is modest compared to rapid growth in recent years and will likely mean the U.S. won’t be able to rely totally on domestic production of the renewable fuel. “Imports of sugar-based ethanol rise to satisfy most of the RFS2 for advanced biofuels not met by cellulosic biofuels or biodiesel,” the report projected.

It also assumes the cellulosic ethanol tax credit will not be renewed and will expire at the end of 2012. The U.S. EPA will need to continue to waive the cellulosic biofuel mandate due to insufficient production. “There is great uncertainty regarding the future of cellulosic biofuels, including not just ethanol but also biodiesel and other “drop-in” fuels,” the report said.

The report did take the increase from E10 to E15 into account. However, its use will depend on its availability at pumps, which may happen slowly, FAPRI said. In addition, the U.S. ethanol industry could find a market for its ethanol overseas, as exports could rise again as they did in 2010, when domestic ethanol was priced competitively with Brazilian ethanol.

The report also warned of volatility in commodity prices due to tight supplies, including corn. “For example, an unexpected drop in U.S. corn yields in 2010 led to the rapid increase in world corn prices,” said Pat Westhoff, director of MU FAPRI. “With stocks limited, a lot depends on the 2011 corn yields. Prices could be much higher—or lower—than our projections.”

The report projects corn prices at $5.32 per bushel for 2010-’11 and $5.03 in 2011-’12. Previously the record was $4.20 per bushel, set in 2007. “Although crop prices are likely to fall back from the levels prevailing in early 2011, strong international demand for food and fiber and domestic demand for biofuels may keep prices well above pre-2007 levels,” the report said.

In 2008-’09 ethanol prices were low, squeezing margins severely. However, in 2009-’10 lower corn prices improved profitability for ethanol plants. That’s changed in the current year, with increased prices in both ethanol and corn. Moving forward through 2020, FAPRI projected that net returns over operating costs would average about 30 cents per gallon. Net profits would be lower as operating costs exclude capital costs, they said.

The report also delved into expected increases in food prices. “After two years of very subdued U.S. food price inflation, food prices may increase by 4.2 percent,” Westhoff said. “Projected food inflation drops to 2 percent, a level matching overall inflation, after 2012.” The increase was attributed to higher prices paid at the farm level for food grains and livestock as well as increased oil prices, which ups costs in agricultural production as well as transportation and processing.

For more information, see the full report.