Unless the “blend wall” is expanded much sooner than currently envisioned and/or ethanol exports are larger than anticipated, ethanol production is expected to stabilize near current levels, according to a University of Illinois report this week. Usage of corn for ethanol production has, therefore, also reached a plateau, the study noted.  Implementing E15 is crucial to expanding the “blend wall” and corn consumption in the future, analysts added.

Reaching the “blend wall” also has important implications for the future of the Renewable Fuel Standard (RFS.) The increasing blending requirements for renewable biofuels cannot be met without expanding the blend wall. Meeting the advanced biofuel requirements with imports of Brazilian ethanol would not be infeasible unless the “blend wall” is expanded. Thus, meeting the advanced biofuel requirements could fall to biodiesel, the study said.

U.S. ethanol production has increased rapidly since 2006, reaching about 13.95 billion gallons in 2011. The increase was driven by a combination of high crude oil prices, RFS for domestic renewable fuel consumption, a generous tax credit for ethanol blenders, and large net exports in 2010 and 2011. The expansion in domestic ethanol production has been one of the main drivers of the corn market since 2006, as corn is the primary feedstock for ethanol production in the United States.

USDA estimates that corn processed for ethanol production totaled 5.021 billion bushels in the 2010-11 marketing year and projects use at 5.0 billion bushels for the current marketing year. Accounting for co-product production, net corn consumption for ethanol production in 2011-12 will be near 3.35 billion bushels, or about 26 percent of total expected consumption.

The ethanol inclusion rate for 2012 is expected to be higher than the 9.5 percent in 2011 as domestic ethanol production remains large, exports decline, and motor gasoline consumption stagnates. Projections from Energy Information Agency indicate an increase of only 0.2 percent in motor gasoline consumption in 2012. It appears that the ethanol inclusion rate could increase to about 9.8 percent in 2012, although the year is not yet half over so considerable uncertainty remains. While one can quibble with the details of projecting the ethanol inclusion rate, there is little doubt that inclusion is very close to the 10-percent blending wall in 2012, analysts added.

The blend wall has important implications for ethanol production and consumption after 2012. In particular, the maximum levels of ethanol blending under current 10-percent blend restrictions may soon be less than the RFS blending requirements. The requirements for renewable biofuel blending was at 12.6 billion gallons in 2011 and is at 13.2 billion gallons this year. It increases to 13.8 billion in 2013, 14.4 billion in 2014, and 15.0 billion in 2015. It seems highly likely that the blend wall will be binding in 2013, and this will constrain domestic ethanol consumption to be less than the RFS mandate of 13.8 billion gallons. Some uncertainty is introduced because the blend wall (in gallons) can change with total motor gasoline consumption.  In addition, blenders have the ability to meet some of the blending requirements from credits generated from recent blending in excess of the requirements, the report said.

Ethanol production could expand beyond current levels with a robust export market. Exports exceeded one billion gallons in 2011. The largest market for U.S. ethanol other than Brazil has been Canada, and there is potential for additional modest growth in that market. Overall, potential for export growth is thought to be small and not large enough to substantially grow overall market size.

It is going to be quite difficult to expand or go around the current 10-percent blend wall for domestic ethanol consumption in the near future. Some loosening could occur further down the road if the issues impeding E15 implementation are resolved. However, it does appear that the long boom in U.S. ethanol production is coming to a close. It is important to keep in mind that this does not mean that ethanol production will fall, as the RFS mandate will keep production at least at the level implied by the 10-percent blend wall (as long as blending economics favor ethanol over other gasoline components). This conclusion also implies that the use of corn in the United States for ethanol production has reached a plateau for the time being, the report said.