By ANN HINCH
Assistant Editor

SAN ANTONIO, Texas — Right now, government mandates for the production and sale of ethanol aren’t enough to overpower the higher price of corn futures, but they do help.

“As long as the price of what we make is more than the raw material we get, (corn) producers will do okay,” said Bill Day, executive director of media relations for Valero Renewable Fuels.
Valero, a refiner headquartered in Texas, owns 1,000 Corner Store gas stations nationwide and supplies fuel to 4,800 other retail outlets. Day said in March 2009 Valero purchased seven ethanol plants from bankrupt VeraSun Energy and has bought three additional facilities since.

According to the Renewable Fuels Assoc. (RFA), Valero operates four ethanol plants in Iowa, one in Indiana and one in Ohio. Each is at least 110 million-gallons-per-year capacity.

Though that’s the extent of the company’s ethanol manufacturing experience, Day said it has been an ethanol marketer since about 1980.

Commodities advisor Shawn Hackett of Hackett Financial Advisors, Inc. remarked recently that the recent announcement by the U.S. Environmental Protection Agency (EPA) allowing the use of E15 for all cars and light trucks 2007 and newer doesn’t change market forces.

Ethanol manufacturers have been overproducing for the last 12 months because it’s been profitable to do so, he said. As pump prices go up, he explained, that profitability is evaporating, as it costs more to use ethanol.

Over the summer, Day said the price of ethanol fell below the price of petroleum gas, and he agrees it was an incentive to produce and blend more – known as discretionary blending. But the price of corn has gone up since then, ethanol is higher than gasoline and he said Valero is doing no extra blending right now above what is needed.

“It’s hard to say,” he said of the effect prolonged higher corn prices might have, though he explained it isn’t much influencing Valero’s current production decisions since it’s been producing at or above capacity. “Because of government mandates, there’s a market for ethanol … The more economic activity (recovery) we see, the more demand for ethanol and other fuels.”

Still, Hackett said, “Government can’t force someone to do something at a loss … If they do force them, they have to compensate them for it.”

He expects bearish, or lower, demand for corn, in defiance of the high demand expectations he sees in the market right now. Corn stocks are not as tight as is suggested, Hackett opined, and South America should plant plenty of corn this fall (it is spring in the southern hemisphere).

Day pointed out some parts of the country still aren’t EPA-mandated to sell even as high an ethanol blend as E10. Valero has a good outlook for immediate continued ethanol production but Day said because E15 use is not covered by equipment manufacturer warranties, the company is hesitant to blend that.
Valero would like to expand its ethanol capability, but facility valuations have gone up since it got into manufacturing a year and a half ago, he said – which makes buying existing plants more expensive now. As for raw material prices, Day said, “Between now and the next planting (in the U.S.), I don’t see anything significant affecting the price of corn.”

Hackett said last month that speculative – for example, index and hedge – funds hold about 30 percent of the commodities market. Any kind of rally in the U.S. dollar or decline in the stock market, he explained, could drive them to liquidate commodities holdings.
“It’s not as bullish as the bulls want you to believe,” he said, adding he still advises his farmer clients to take advantage of the corn market now and not wait for futures to soar higher, as many did in 2008, only to lose out.

Farm World contacted ethanol producer Archer Daniels Midland as well for remarks for this article, as it operates seven Midwest ethanol plants according to the RFA, but the company declined comment.