When gas prices plummeted during the recession and at least half of US ethanol producers went bankrupt in the 2008-2009 ethanol crash, ethanol production continued to increase. But ethanol will crash again in the face of a summer drought, and this time the crash will be more definitive.
The difference this time around is that the ethanol will not crash because of product value, but because of under-supply of feedstock, like corn.
The US is now experiencing its worst drought in over half a century; the United Nations is warning of a food crisis and EIA is warning that exports will be significantly affected. In the meantime, corn-ethanol producers are struggling to defend a federal mandate that sets out ambitious ethanol requirements.
The US Energy Information Administration (EIA) says the drought is likely to hit exports but not cause any significant rise in ethanol-blended gasoline. However, we might take issue with this prediction as a longer-term loss of ethanol will surely affect the supply and price of the gasoline with which it is blended.
Corn crops are shriveling and corn prices have reached record levels, in turn boosting ethanol prices. According to the EIA, ethanol output should fall by 70,000 barrels per day for the second half of this year, but the main impact of will be reduced ethanol exports, rather than an increase in gas prices.
The push to produce corn-based ethanol has helped push corn prices up to more than $8 a bushel today, from just over $2 in 2006.
The obvious battle lines are drawn between livestock farmers who are being negatively affected by the high price of corn, and feedstock farmers, who are benefitting from the federal ethanol mandate. Politically, congressmen representing livestock states are calling on the Environmental Protection Agency (EPA) to remove the federal mandate for ethanol. The bulk of these calls are coming from Republicans, but there is some bipartisan support for such a move. Clearly the corn-producing states of Nebraska and Iowa would like to see the mandate remain in place.