Over the past several years we have seen several changes take place in the United States’ renewable fuel industry. One of the greatest is that today’s plants are much more efficient when making fuel, especially ethanol.
This is the result of improved manufacturing processes, but also from improved corn genetics. It is now possible to get nearly 2.5 gallons of ethanol from one bushel of corn, almost twice as much as early plants did.

The concern that has come with this increased ethanol production is it is taking place faster than demand. Ethanol manufacturing has hit what is termed its “blend wall,” meaning the market is saturated with product.
Economists claim the easiest way to remedy this situation is with higher blend mandates than the current 10 percent. Government officials have been hesitant to alter this figure, though (on all but model year 2001 and later cars and light trucks, which are deemed suitable for E15), as the impact on fuel distributors and engine performance is still unknown.

Ethanol has topped feed for the biggest corn demand projection for the first time in history, at 5.1 billion bushels. This number is highly questionable, as the possible removal of subsidies and import tariffs could greatly change the industry’s profitability. The increasing amount of ethanol received from a bushel of corn is also distorting the total corn usage projection.

The elimination of ethanol import tariffs may actually be beneficial for the industry. By eliminating this tariff, it will likely align the U.S. more closely with the Brazilian ethanol market. Brazilian ethanol is manufactured out of sugar, so the U.S. industry will actually benefit from high sugar prices.

U.S. ethanol exports are on track to reach 750 million gallons this year, well above last year’s 400 million. One of the leading buyers of U.S. ethanol is Brazil, which had taken 120 million gallons through May and is forecast to buy another 70 million gallons by October, according to the firm FC Stone.

These higher imports are the result of Brazil selling more raw sugar into the world market, as the profitability on that commodity is higher than for ethanol.
It is quite possible that if the U.S. suspends it ethanol subsidy program, ethanol exports could actually increase. Several ethanol importers avoid product from the United States, claiming supports give it an unfair advantage in the world market. Without these subsidies, our ethanol will be more freely traded, and demand could actually increase.

Some groups are opposed to U.S. ethanol exports, though, as they feel this means U.S. taxpayers are actually subsidizing foreign fuel consumers.
The U.S. biodiesel industry continues to expand production. So far this year it has consumed 425 million pounds of fats and oils, well above last year’s 178 million. Of this, 247 million pounds is soy oil, which is up from last year’s 94 million.

The concern in the biodiesel industry is that once subsidies are removed or even just lowered, it will drop production to a minimal level again.

Obviously, there is a considerable amount of unknown in the renewable fuel industry as we move forward. Other than what will take place in the subsidy program, the greatest of these is what renewable fuels will be made from; a large amount of work has been done with cellulosic fuel production, but this is still in its infancy stage.

Once we see an increase in alternative raw stocks for fuel production, we will see less demand for corn and soybeans.

Karl Setzer is a Commodity Trading Advisor/Market Analyst at MaxYield Cooperative. His commentary and market analysis is available daily on radio, in newsprint and on the Internet at www.MaxYieldCooperative.com

The opinions and views in this commentary are solely those of Karl Setzer. Data used for this commentary obtained from various sources believed to be accurate. This commentary is intended for informational purposes only and is not intended for developing specific commodity trading strategies. Any and all risk involved with commodity trading should be determined before establishing a futures position.