East of Des Moines on Interstate 80 Last Week

The flip side to food vs. fuel is that the corn crop may come up short enough to drive ethanol in part off the market for gasoline addition. Estimates are putting the price increase at 15% or nearly 60 cents per gallon. At 10% in E-10 mixes that could be high but even at a straight 10% we’re at 40 cents more per gallon. Do we still want to be inventing complains about corn being used for fuel?

It’s possible, but of dubious likelihood, that the feds and states could get their regulatory acts together and issue waivers, but if history is any guide that would come late and shock fuel buyers even more than today. Some minimization of the impact could come with fast action. But, don’t hold your breath.

The impacts are already being felt before this year’s crop is grown. A similarity exists to the Katrina disaster although smaller in scale. Katrina forced refineries going off line that were down for weeks and months. The Iowa floods have shut in some ethanol plants, closed rail lines and wiped out bridges both roads and rail. This slows corn in and ethanol out. Adding rail cars and trucks would bring the in transit inventory up to close the gap over time, but the available railcars and trucks are in full use now. If you thought oil was short – ethanol is only at a 20-day supply.

Those are good reasons to expect that blended E-10 gasoline will be in short supply this summer. Over the next 18 to 20 months, the shortfall might be significantly more costly. The USDA crop report had already called down the corn crop by one billion bushels, a 7.5% reduction from last year before the flooding occurred. This plus the growth in demand and production from 6.8 billion gallons in 2007 to a projection for 2008 of 9 billion gallons will push the corn price higher.

This is not all locked in though. Ethanol is a market unto itself, traded on the Chicago Board of Trade, not the New York Mercantile where crude is traded. Ethanol can be bought from the production facilities on the CBoT and prices can be locked. That market has had ethanol priced low lately making it difficult to earn profits. An outsiders look in for a metric is called the “Crush Spread” or the subtraction of corn prices from ethanol prices. Ethanol until last Friday’s close still looked cheap at $2.80 a gallon, and it was – compared to gasoline.

The variables to predict the effect on gasoline is harder to figure. It might be that ethanol prices will stay high enough to keep production and transport over 8 billion gallons or close to 9 billion. With Friday’s ethanol at about 50 cents a gallon cheaper than raw unleaded gasoline and counting the government credit of 51 cents, gasoline might not have an upward price pressure. But.

Several million acres of corn is under water and lost. The Chicago Board of Trade is starting to reflect this in later 2008 and 2009 pricing. The actual delays in deliveries are yet to be determined as the road, rail and bridge damage isn’t scheduled for repairs and reopening. We probably won’t make it to 2009 without some price impacts.

Ethanol is fully 6% of U.S. gasoline use now and to make up for any shortfall would require more gasoline by more refinery runs to gasoline which means more crude oil used or more imports in competition with the rest of the world driving gasoline prices higher.

The lesson in this is that fuel products are closely interconnected in the world pricing mechanism. With biofuels just beginning to take some market share and a reduction of some share of 6% at risk, we see clearly that the supply and demand spread is way too close for comfort. The important thing to take away is that biofuels can make an enormous positive difference over time, and that just starting out with corn fed ethanol makes clear that the widest possible array of sources and fuel products is in everyone’s best interest. So, the sooner the better.


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