Through the hard work of nearly every corn farmer and various commodity and farm organizations, ethanol has become a significant motor fuel and new use of surplus corn. While corn has moved from surplus to a demand commodity in the past several years, more ethanol plants have been produced to meet the demand for ethanol by the motoring public and to satisfy the various governmental mandates for it use. But at some point ethanol will be found in nearly all of the US motor fuel, and what happens at that point of market saturation. Can agriculture afford for ethanol to be a surplus commodity?

The answer to that question is no. Agriculture cannot afford for ethanol to be in surplus and both economists and policy planners should anticipate the day that ethanol has saturated the conventional 10% blend of the motor fuel market. Iowa State economists Bruce Babcock and Michael Boland track the use of ethanol in the fall issue of the Iowa Ag Review.

2008 fuel consumption is estimated at 138 billion gallons of gasoline and 9 billion gallons of ethanol produced in the US and 800 million more imported. The economists say, “The net benefit of replacing a gallon of gasoline with a gallon of ethanol depends on whether gasoline blenders perceive that ethanol is a perfect substitute for gasoline on a volume basis or an energy basis. At a 10 percent blend, it is doubtful whether most consumers perceive a change in gas mileage, so it is likely that gasoline blenders value ethanol on a par with gasoline on a volume basis.” The net benefit equals the price of ethanol, minus the wholesale price of gasoline, plus the 51¢ per gallon blender’s credit.

Ethanol use was substantially promoted by the US Renewable Fuels Standard, along with the EPA mandated phase out of MTBE in 2006, the latter of caused ethanol to be used in nearly all of the gasoline blends used in geographic areas mandated by the Clean Air Act. Those regulations shifted ethanol from being in 20% of the motor fuel to more than 70% today.

By 2015 federal law will require the use of 15 billion gallons of ethanol, and based on a 10% blend that would saturate the market of 135 billion gallons of gasoline. Two scenarios would present themselves; one would be ethanol that was all refined and no where to go, or exporting ethanol to the international market. Surplus ethanol means the price drops, and likely takes the corn market down with it. Exporting ethanol would subject the US to accusations of dumping it on the world market, since subsidies had been involved.

Economists Babcock and Boland point to, what they call, a contradiction in US policies that promote more ethanol use, and call for increased ethanol production, yet define the blend as 10% ethanol. Those familiar with E-85 will point to that blend of 85% ethanol and say that is the answer, and it partially is the solution. Although 85% consumes serious quantities of ethanol, availability is an issue because of the lack of pumps approved for dispensing a fuel that is 85% ethanol.

The alternative is a blend that is slightly higher than 10% ethanol, such as E-12, which would be a temporary relief valve to allow more ethanol into the motor fuel supply without causing massive engine failures. That would allow 15.5 billion gallons of ethanol to be blended with 115 billion gallons of gasoline without impact on the price of ethanol. The remaining issue is what to do with the ethanol that will enter the market, as more cellulosic ethanol is produced as mandated by the final years of the Renewable Fuels Standard.

Summary:
Ethanol has been a success story, thanks to grassroots promotion by farmers helped by beneficial federal policies. But the policies that promote more ethanol use from both corn and cellulosic sources may soon collide with the policy that restricts ethanol to a 10% blend. With the lack of sufficient vehicles to use E-85 ethanol and the lack of sufficient pumps to dispense E-85, there will soon become a time that ethanol will sit in surplus and drive down both the price of it and the price of corn. The solution may be to slightly bump up the conventional 10% blend to 12% or more, and keep a continuing demand for the ethanol that comes to market with increasing volumes.