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KC Fed: Ethanol Markets Shape Production

The persistent drought has yet to let up in many parts of the country, and though the corn crop used for ethanol is out of the ground, there's still concern about short supplies and high prices.

Those concerns are the focus of a new Kansas City Federal Reserve report that points to the markets, not mandates, as the primary driver behind corn ethanol production.

"Although mandates were key in supporting biofuel expansion several years ago, the ethanol industry is increasingly market driven," report author Nathan Kauffman writes. "Accordingly, market-based incentives emerging from crude oil and corn markets will stake the path forward. "

Kauffman's report finds that though a U.S. grain shortage had an impact on the food and ethanol sectors, much of the hoopla surrounding the Renewable Fuels Standard – an Environmental Protection Agency-mandated production level for ethanol – was unwarranted.

"A temporary waiver would not relieve the pressure on current production to build credits to satisfy future mandates. In addition, the ethanol industry has become more market-based as production has exceeded the mandates in recent years. If energy prices rise faster than agricultural commodity prices, ethanol profits could expand and production soar regardless of mandated levels," Kauffman asserts.

Also, Kauffman says, ethanol is a primary octane enhancer and fuel oxygenate, a purpose few other products serve – another factor that points to markets, not mandates, as a driving factor behind the scale of ethanol production.

The blend wall

Kauffman continues to note that the RFS, while a building block of the U.S. ethanol industry, has been "largely irrelevant" since 2010, due to high ethanol demand consistently pushing production over mandated levels.