Ethanol and Corn Markets: Impact of the E15 Gasoline Exemption

Following an announcement from the White House several weeks earlier, the US Environmental Protection Agency (EPA) issued a waiver on April 29 to allow the sale of E15 gasoline this summer.

In previous years, the sale of gasoline with an ethanol content of 15% (E15) was prohibited between June 1 and September 15 due to its contribution to the accumulation of smog during the warmer summer months.

What effect would this have on US ethanol demand and what does it mean for corn markets, from which ethanol is produced?

The change E15

Ethanol is one of the renewable fuels mandated by the US Renewable Fuels Standard (RFS) to be blended with transportation fuels to reduce greenhouse gas emissions. Typically seen in the E10 formulation (10% ethanol, 90% gasoline), the price of ethanol-blended fuels tends to be lower than that of gasoline, reflecting their lower fuel economy (especially at higher blends). ). Nationwide, this biofuel is created primarily from corn, which accounts for approximately 40% of annual US corn production.

Recent sharp increases in gasoline prices have prompted policy measures to reduce the cost burden on consumers, and on April 29, the US EPA announced a waiver to allow E15 gasoline to be sold in the summer. This is intended to combat high prices by increasing supply through greater use of ethanol.

Impact on US ethanol

Availability of E15 sold at the pump is limited: Approximately 2,300 of 153,000 retail stations nationwide sold E15 in 2021. The limitation in availability is due in part to compatibility requirements of certain equipment. Consumer awareness and concerns about engine compatibility have also contributed to limiting the growth of market adoption.

In 2021, E15 accounted for just 0.6% of all blended gasoline consumed, equal to 800 million of the 134.8 billion gallons of blended gasoline sold. Assuming barriers to further adoption of E15 remain, the waiver of the E15 ban is expected to lead to increased demand for an additional 15 million gallons of ethanol. While this may seem significant, it is only 0.11% of the 13.8 billion gallons of ethanol used annually for gasoline.





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Do we have enough corn?

In 2021, the US produced a total of 15 billion bushels of corn. The additional 15 million gallons of ethanol that E15 is likely to consume this summer is equivalent to 5.6 million bushels of corn, just a 0.04% increase.

U.S. annual corn production typically fluctuates by ~500 million bushels from year to year, with a range of 13.6 billion to 15.1 billion bushels as of 2016. As a result, it is unlikely that the additional demand created by E15 has a noticeable effect on supply.

More important are the impacts caused by the restriction of staple food crops due to disruptions in production and exports in Ukraine, as well as lower expected wheat yields in India, both of which may create material impacts on food availability. grains and food security in selected countries.

What about E85?

The recent rise in gasoline prices has also led to a shift in demand for E85 gasoline, which is sold at a discount to E10 and E15 gas blends. E85, also called Flex Fuel, consists of 51% to 83% ethanol mixed with gasoline. This percentage changes throughout the year to adjust for seasonal temperatures.

Since the beginning of March, demand for E85 has increased to 8,000 barrels per day, compared to the 2021 average of 6,000 barrels per day. If this change persisted for an entire year, the impact would be 25.7 million gallons of ethanol (0.17% of annual ethanol production) or 9.5 million bushels of corn (0.07% of annual production). corn annual).

While there has been a change in purchasing behavior, the impact is again negligible due to limited availability. Like E15, E85 has a small distribution network and is only available at 2.4% of petrol stations (3,700 locations).

Synthesis

The summer waiver for E15 is not expected to have a significant impact on the ethanol and corn markets, due to limitations on further market adoption of E15. While we do not expect material supply impacts in these markets, disruptions to production of key staple crops in other regions should be closely monitored.

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