I wrote yesterday about the likelihood of a dramatic increase in corn prices due to the damage done by the floods.
I found this article today, where a commodities analyst is claiming that due to the crop loss from the flood, corn could go to $16/bushel.
What????? It wasn’t that long ago that corn at $4/bushel was nearly laughable. Today, corn futures have moved to over $7.90/bushel.
Well, I got to thinking….we use some of this corn to make ethanol. Most states require an ethanol blend for automobile fuel. What’s the impact of increasing corn costs going to be on our fuel costs?
To date, the financial impact of adding ethanol to the fuel has been a benefit to consumers. Even today, ethanol sells (OK, I’m not mucking this with all the subsidies it gets that we pay for via other taxes…let’s just keep this simple) for under $2.90/gallon. The easy math says that if your average fuel is around $4/gallon and ethanol is less than that, then blending the ethanol is having some impact of bringing the total price down on a gallon of fuel.
Now let me scare you:
Look at what has happened to the price of corn futures in the past month:
In less than two weeks, the price of corn has moved up 18%. With corn a major ingredient of ethanol, these price increases should have an impact on the price of ethanol….and they have. Just look:
During that same two weeks ethanol futures have increased 13%. But corn is only at $7.90, what happens if it goes to $16/bushel? A quick back of the envelope says that $16 corn would easily translate to $5 ethanol.
Hmmmmm, now unless our fuel cost per gallon exceeds $5/gallon, the ethanol additive will actually increase the overall cost per gallon!
One more reason to shelve ethanol: Acts of God (read that floods, hail, drought, etc.) have a much more dramatic effect on agriculture than on drilling or mining.
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It’s not quite as simple as that. You have to compare not only the futures markets, but also the same month. I know CBOT and NYMEX (ethanol and reformulated unleaded, not laced with ethanol, respectively) don’t make it easy; the default “chart” month for ethanol is December, while it is July for gas.
At the beginning of April, both ethanol and gas futures were trading at about $2.30/gallon, for both July and December delivery. Gasoline exploded with the explosion in the crude market, up to $3.43 (and change)/gallon (essentially live) for July delivery and $3.24 (and change)/gallon for December delivery.
Meanwhile, it took the floods to get the ethanol market to move from its $2.30-$2.40 trading range, up to (as of yesterday) $2.859/gallon for both July and December delivery. Interestingly, August and November futures were higher than July/December.
I think we’re in agreement….both of the charts, and info, were for Dec. delivery of the options. Felt like that would be a good timeframe as it should have the “known” of the impact of the flood.
December’s a good long-term timeframe; the corn that’s under water now would have been in the pipeline (so to speak; ethanol and pipelines don’t mix) by then.
One thing I forgot to note; the ethanol futures do not have the $0.184/gallon federal gas tax on it. If memory serves, the gas futures do.
The tax thing on ethanol gets real goofy because of the subsidies that provided…that’s why I just stayed away and looked at the “retail” price.
A point I overlooked though is that the $5 ethanol price would be comparable to (roughly) the retail rate of gas less about $.43 of taxes (about $3.40 or so now in MN)…that makes the issue even worse…if it comes to be.