Morgan Stanley Says Policy Changes Won’t Hurt Ethanol Demand

Potential changes in a U.S. government mandate for ethanol are unlikely to “materially impact” demand for the gasoline additive made from corn, Morgan Stanley said.

Livestock producers and some U.S. lawmakers have asked President Barack Obama’s administration to cut a requirement that refiners use ethanol, after drought spurred corn prices to surge to a record last month. Blenders are unlikely to stop using ethanol even if the mandate is scrapped, because the fuel additive is trading at a discount to gasoline, Morgan Stanley analysts including Vincent Andrews and Hussein Allidina wrote in an e-mailed report today.

“Economics, not politics, drives ethanol use,” Andrews and Allidina wrote. “Other than an outright ban on ethanol use, we do not believe that any policy change will materially impact ethanol demand, and therefore corn prices.”

Denatured ethanol futures are up 20 percent since mid-June on the Chicago Board of Trade, while corn surged 59 percent as the U.S. Department of Agriculture declared more than half of the country’s counties as disaster areas because of drought. Refiners will be required to use 13.2 billion gallons of ethanol this year, under the Renewable Fuel Standard (RFS) mandate.

More than 150 U.S. lawmakers petitioned last week the Environmental Protection Agency, which regulates the renewable-fuels market, to limit the RFS requirement. A coalition of livestock producers, including the National Cattlemen’s Beef Association and the National Pork Producers Council, have said the ethanol mandate is causing “severe economic harm” for farmers.

Gas Prices

Repealing the mandate would set a “very negative precedent for future government endeavors that required side-by-side private sector investment,” Andrews and Allidina wrote. Job losses and higher gas prices also would result from scrapping the RFS, so the government is unlikely to act, they said.

The U.S. would still need to produce 12.9 billion gallons of ethanol this year for the country’s gasoline supply, even if the biofuel policy changes, Andrews and Allidina wrote.

Blenders have “significant structural impediments” against switching away from ethanol, including industry requirements for octane and oxygenates for which ethanol remains the least expensive source. Futures prices for corn, ethanol and gasoline also “suggest that blending will remain profitable well into the future,” they said.

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