Topic: What the Ethanol Industry Fears - Part II by Robert Rapier (Read 597 times)

rufus · « **on:** February 22, 2010, 09:38:14 PM »

What the Ethanol Industry Fears - Part II by Robert Rapier

http://blogs.forbes.com/energysource/2010/02/22/what-the-ethanol-industry-fears/

I added my two cents that dropping the subsidy on E10, and below would be fine as long as it's kept in place for E20, and above.

It's on Forbes, so it's getting some traction. You might want to "pitch in."

1outlaw · « **Reply #7 on:** February 24, 2010, 09:37:32 AM »

fleebut asks; "Are those cooperatives any good? You know vertical market share? Are those market contracts good?"

Not sure what cooperatives you are referring to. I spent 26 years in my old life working for a supply Co-op. Generally what they shine in is honesty for delivering good product, the correct product, and in the correct quanity. Where they tend to fall down in is price, since between the regional buying co-op and the local, there can be bloat, poor mgt, and too much gross margin somewhere in the long chain-- however- the too much margin issue can be somewhat mitigated by the return of patronage- especially if it is prompt and heavy on cash. Generally patronage is weighted towards stock however and is long term in nature 7-12 year revolvement. If the Co-op goes thru a rough period stockholders may lose their value. How they survive rougher times is living on your stock value rather than so much borrowed capital.

fleebut · « **Reply #6 on:** February 24, 2010, 05:10:48 AM »

Thanks for the insight Outlaw. Would speculation still be driving beans still? Meaning biodiesel blenders credit resumes? I've noticed in general the commodities market has level loading or demand loading to greatly dampen prices. The logging industry manipulated this way. Yet, if it gets out of control it really moves. The big players more capable at this, maybe some collusion. Guess if the players can store more, adjust production, have more marketing power, flex the feedstock and product line, well like the big players better position to max market position. That's a tough row to hoe, but may it be more important than the small producers like to think about? That running on the edge very risky. The afore mention logging industry, those mills store or invest in huge stockpiles. Just an accountant calculation on maximizing purchasing power.

Better to spend money for long term stability. Now, this would be a good use of Federal Job bill monies. Investments aimed to shore up alternative energy stability, such as process capability, efficiencies, storage, and development of co-products. To armor this sector up against tough market conditions, might be a good investment of country. Grants and low interest loans with R&D basic to those complimentary industries.

It amazes me how the government sausage process empowers corrupt market practices. Look at winner status of businesses and labor, they all have achieved protection upon sausage making. Politicians especially career politicians horrible at long term sheep herding of overall health of nations economics. Politics should not be a career.

Are those cooperatives any good? You know vertical market share? Are those market contracts good?

rufus · « **Reply #5 on:** February 23, 2010, 11:30:14 PM »

YEAH, THAT MAKES A BUNCH OF US

I don't, really, think there's a Chinaman's chance in hades that they'll "drop" the blenders' credit. They may have to whack it down a bit, though. Maybe, a dime, or so.

1outlaw · « **Reply #4 on:** February 23, 2010, 09:34:31 PM »

I am not an economist Cessna- though like most here have been trained in it at some point. What few us have is the time or resources to really study this topic. My thinking is that in the long term what it does (to pull away the credit) is cap not only ethanol demand and price, but to also cap corn demand and price down to the point of just what is needed for E10. You know how that goes Cessna- if there is a diverse set of producers of both corn and ethanol- both will overproduce and the price will fall for both. If oil ends up owning ethanol- they will do just like ADM did in the early days and refiners do today- watch supply like a hawk and proactively shut down production or use this overproduction to weed out competitors. Corn either way ends up the stepchild that gets the beating- likely less profit in corn do to lower use and less volatility if oil owns ethanol production. Now why did soybeans and soy oil not take a beating yet? My guess it has to go thru another 6-12 months- not so sure on that- you probably know your "beans" better than I.

Frankly the dollar has more to do with grain prices than most fundamentals- a weak dollar leads to "Funds" speculation and export increases. The odd part with the bean thing is that the dollar was stronger during part of this period was it not?

I guess I could have just said-- I DO NOT KNOW

cessna · « **Reply #3 on:** February 23, 2010, 05:47:02 PM »

I have a question. If the blenders credit goes completely away, what's going to happen to the price of corn. Right now biodiesel production is basically shut down so soy oil should be glutting the market. Should be back to prices like pre biodiesel days but it's not. I'm not sure how this will play out but an ethanol plant can only operate at a loss for so long making something that has to be made and used.

1outlaw · « **Reply #2 on:** February 23, 2010, 12:40:06 PM »

The blender credit must be maintained for now in the "voluntary segment" that is outside of the RFS. Reason is that; 1) the investment while done at the terminals by oil companies for mandated portion--is not done at the station level for higher blends. This means E85 with all new investment is forced (at a time where there are still few FFV's) to compete with long paid for retail pumps running much higher volumes of gasoline. 2) oil companies are also subsidized via oil depletion allowances and other means we have discussed here before, 3) oil company high volumes mean they can gain incentive programs for branded credit cards and not allow those incentives on E85, 4) E85 in a station also does not qualify for other branding incentives such as price signs and decals--these will be paid for up front by the station owner, 5) any fledgling product needs time to get off the ground- especially when the car maker's bias is to optimize for the established product -gas, 6) Motor fuel taxes are volumetric- not btu based (except for propane, diesel fuel, natural gas)- thus part of the credit is needed to be fair to the end user on a per mile basis- again- at least until optimized engines are available, 7) The ethanol market price is determined by the cost of production vs surplus/demand - a tiny amount of overproduction drives the market down very quickly below cost of production when there is no "elastic" incremental demand to use up the surplus. If the USA wants to grow ethanol production without periods of market crashes with the govt either being too slow to react or to fast with RFS adjustments (and allowances for higher % eth in the fuel) then the only sensible way to provide a stable enough environment to keep growing 2nd and 3rd generation ethanol is to provide incentives for the higher blends optional use by consumers- E20-E85. To kill the incentives in this area is to kill off all non-mandated markets and thus be yo-yo'ed by congress, the EPA, API, CARB, and such- oil companies are the only place where the resources to "wait out" or influence govt exist in enough quanity to survive. (has anyone seen the TV ads they are running about "providing all the natural gas and fuels for agriculture the last week or so?)

I will not cry over the loss of the blender credit for mandated obligated parties- BUT IT MUST NOT GO AWAY FOR E20-E85 !

fleebut · « **Reply #1 on:** February 23, 2010, 10:45:22 AM »

It does seem redundant for the fuel supplier to be mandated to VEETC ethanol content of fuel then receive RFS blender credit for compliance? Am I missing something here?

I thought ethanol was a cheaper fuel additive for fuel supplier to boost octane rating with inferior unleaded base stock. Wouldn't ethanol be the best low cost additive for mid test and high test fuel? And would they normally migrate to ethanol to accomplish higher octane fuel?

It seems the best for consumer and gas station owners to have these blender pumps. Customers blend their own low-grade, mid-grade, high-grade, or E-85. Gas stations have an incentives to sell more ethanol at lower costs. Fuel supplier has less mixing. But if the blender credit goes poof, will blender pumps lose out?