With last week's 73 to 27 U.S. Senate vote to kill ethanol subsidies, cash corn producers' market trigger fingers twitched nervously. Livestock producers shouted with glee, expecting to see relief in high feed costs.
But what's most likely to happen? That's what Farm Progress asked its team of market analysts. The consensus was "not much", and here's why.
While Congress is moving closer to killing the ethanol subsidy, it's not there yet. And the Thune-Klobuchar measure, also offered in the Senate would replace the ethanol subsidy with a variable excise tax credit tied to the price of oil. The ethanol industry and major ag groups support this proposal which The Renewable Fuel Standard is still in place to guarantee a strong base of usage, notes Farm Futures Market Analyst Arlan Suderman. "The impact [of the Senate vote] is more psychological than anything. Example, a week ago corn touched $8 as everyone feared we'd run out. A week later, we're $1 lower because investors fear that a country in Europe may default on some debt. Our fundamentals didn't change.
"Greece defaulting won't change supply and demand enough to be noticed. But the perception has changed.
"There was a lot of talk on Wednesday that corn prices were down because the Senate was voting on the first amendment. I talked to a trader on the floor and confirmed that it had almost no impact. The structure of the ethanol industry will change. But as long as the [RFS] mandate is there, it'll be produced."
The RFS mandates 12.6 billion gallons of corn ethanol demand this year, climbing to 15.0 billion by 2015. Even in a world without subsidies, blenders are still required to buy a lot of corn to satisfy this requirement.
"The export market for ethanol is heating up as well," points out Suderman. "From a fundamental standpoint, ethanol production will continue to consume corn as long as the consumer wants energy for his/her car, both here and overseas. That's the bigger issue at this point."
Bigger picture still unclear
Last week's Credit Suisse report on Archer Daniels Midland reached the same conclusion. As long as RFS untouched, "the subsidy cuts on their own won't materially reduce domestic corn ethanol demand over the next two years.
"The bigger question," according to Credit Suisse, "is whether corn ethanol demand above the RFS can continue or not when subject to free market forces. That'll depend on whether ethanol exports can continue at the current pace and the longer term spread between corn and oil prices.
"It also will depend on whether [U.S. Congress] will put money toward building the necessary infrastructure to transition the U.S. from 10% to 15% ethanol blends and whether the blenders will embrace 15% in a free market. That's still up in the air.
The Credit Suisse report also suggested that the $0.45 per gallon blender credit is no longer playing a big role in the economics of ethanol blending. With blenders already blending ethanol at the 10% limit anyway, they really can't blend beyond that. That is why ethanol spot prices are trading below their closest gasoline substitute despite the credit.
Ethanol producers may cut back a little in the short-term as they wait to see how the politics play out. The producers are facing a period of eroding profit margins anyway, as their hedges on corn roll over.
A short-term cut in ethanol production might have a modestly negative impact on corn prices. But uncertainties over the size of the 2011 corn crop will limit that impact at least through July. And the bigger political battle on 15% ethanol blending has yet to play out.