Infographic du Jour: Cornfields vs Oilfields

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This post is a guest contribution by Dian Chu, market analyst, trader and author of the Economic Forecasts and Opinions blog.

According to CME Group Ethanol Outlook Report dated February 07, 2011, corn prices have rallied by 90% whereas ethanol prices have rallied by only 55% over the past 7 months.  That has resulted in a negative ethanol-corn crush margin of -1 cent per gallon from the 20 cent profit last July. (See Chart)  The spread between ethanol and raw sugar is even worse at close to -$3.

The CME report went on noting that most of U.S. corn-ethanol producers are barely profitable at present, some are already losing money and that the profit risks remain high for ethanol producers if corn continues to rally.

Currently, the ethanol industry receives 45 cents per gallon in government subsidies — an annual payout of about $6 billion.  And according to AltTransport.com, the corn ethanol industry has received over $30 billion in federal subsidies over the last three decades.

Bloomberg data show the annual market value for ethanol in the U.S. has risen to $27.1 billion since federal support began under President Jimmy Carter during the 1970s energy crisis.  The industry has had at least a dozen companies seek bankruptcy protection since 2008; however, things are looking up due to a recent EPA decision.

The EPA (U.S. Environmental Protection Agency) announced in January 2011 that it will expand E15 gasoline for 2007 or newer cars, to cars and light trucks from the 2001 through 2006 model year as well.  That’s up from the current permitted 10% ethanol level in gasoline.  Under the terms of the 2007 Energy Independence and Security Act passed by Congress in 2007, the U.S. is required to use 11.1 billion gallons of ethanol in 2010, up to 36 billion by 2022.

Prices for many agricultural commodities have been rising primarily due to poor crop yields caused by bad weather, certain producing countries restricting exports, increase in oil prices and fluctuations in currency markets.  Meanwhile, the 7-month surge of corn prices coincides with a new historical peak of world food prices, also for the seventh consecutive month, according to the FAO Food Price Index.

So far, there are very few signs of commodity price abating any time soon, while gasoline demand growth is on a downward trend.  So, if ethanol producers are already barely profitable or losing money due to high corn prices, with current subsidies, it seems to suggest either more government subsidies would be needed to keep producers afloat or more bankrupt producers on the horizon (an ethanol bailout?).

Meanwhile, the EPA has been sued by industry groups including food/farm as well as automaker over its E15 decision.  Food vs. Energy has long been a heated debate, and in light of these recent events, the infographic below (h/t Ashlee) pretty much sums up various arguments regarding corn ethanol.

Corn Ethanol offers roughly 10-20% reduction in greenhouse gas emissions compared with gasoline.  However, powering a car would require 11 acres of corn a year that can be used to feed at least seven people.

Using ethanol as an additive to fuel won’t replace much foreign oil…[but] reduces fuel efficiency and lowers fuel economy.

Source: Dian Chu, Economic Forecasts and Opinions, February 7, 2011.

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More on this topic (What's this?)
Cosan: No Haven for Ethanol Investors
Cosan: No Haven for Ethanol Investors
Blue Sugars: Not Blue, But Certainly Sweet
Read more on Ethanol at Wikinvest
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