Ethanol surge as a force in wheat

by Morton Sosland
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Reading a complaint about how difficult it is to separate trends from noise brought to mind the need for grain-based foods to understand what is happening in demand for corn, especially for making ethanol. Next to the specifics driving the wheat market, hardly anything is more important to wheat prices than the situation ruling in corn, where shortfalls in supply in some fairly recent crop years have accounted for overwhelming gyrations. Now that consumption of corn for producing ethanol is expected to account for a record 5,250 million bushels this crop year, and that the total is the same as feed use, understanding possible ethanol shifts becomes critical.

It is right here where noise leads to confusion. When the Environmental Protection Agency announced in late May its proposals for processing obligations under the Renewable Fuel Standards Act, reactions reached high decibels. The National Corn Growers Association said the E.P.A. disregarded its obligations under the act by setting standards at a level cutting corn demand by nearly a billion bushels. The association, pledging a fight “to protect and build profitable demand for corn,” promised legal action.

At the other extreme is a range of interests that include those ready to accept the E.P.A. proposals and media like The Wall Street Journal that opined that the proposal ripped away the last tether connecting ethanol subsidies to reality. Warning about how blending ethanol in gasoline above the 10 per cent level threatens damage to engine parts and fuel systems, the Journal says that ethanol has not lived up to its promise of reducing either dependence on foreign oil or carbon emissions. It urges the end of mandates and subsidies that spur it to describe ethanol as being “made from corn and tax dollars.”

The record processing of 5,250 million bushels in 2014-15 for making ethanol leaves another 1,300 million bushels of corn going into industrial use. That total of 6,550 million bushels for industrial processing not only represents the largest single outlet, but use that has expanded largely as the result of government programs. It has created a massive new industry that attracted large plant and equipment investments. Expansion to current levels has mainly been in the first two decades of the 21st century.

An obvious boon for corn farmers who have increased production to supply this new industry, ethanol has not won universal plaudits. Still fresh in many minds are the searing time when both corn and wheat prices soared and demand for ethanol processing played an important demand role. Mandates from Congress far exceed what is usable at current gasoline blending levels. Thus for 2015-16, the E.P.A. proposed a mandate of 13.4 billion gallons, an increase of just 146 million from actual use in 2014-15. There’s still a gap between this proposal and the likely “blend wall,” which is made up of how much will be used in gasoline. The gap will have to be met by using more ethanol in blends different from the conventional. Most analysts of the E.P.A. proposal and the outlook for fuel consumption affirm that processing of corn for ethanol in 2015-16 will once again be quite near the current season’s record. If market prices guided by balance between supply and demand are hoped for, having a supply of corn in line with the previous year is going to be essential. The current 2015-16 supply forecast by the Economic Research Service, of 15.5 billion bushels, meets that requirement and points to few surprises except for a worrying list of uncertainties.

This list may be longer and even tougher than any from the trying past. It includes whether any of the powerful nay-sayers will prevail, the weather uncertainties for the crop, the expansion under way in livestock and poultry, motor fuel use and usual questions about export demand. The important point is that these are issues as relevant to wheat as they are for corn.

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