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Scaled-back ethanol mandate bodes poorly for fertilizer stocks

Part 3
Scaled-back ethanol mandate bodes poorly for fertilizer stocks (Part 3 of 4)

Why the ethanol mandate would keep crop and fertilizer demand low

U.S. fuel ethanol production

In the United States, total fuel ethanol production has averaged around 867 thousand barrels a day. But fuel ethanol production was lower throughout 2012 due to high corn prices. So excluding this impact, fuel ethanol production in the United States is slightly higher, at around 890 thousand barrels a day.

US Fuel Ethanol Total Production 2013-11-26Enlarge Graph

600 million gallons scale back

One thousand barrels of ethanol is equivalent to 42 gallons. This equates to roughly 13.6 billion gallons a year from June 2010 to May 2012. The latest proposal to scale back ethanol production would cut back ethanol requirements to about 13.0 billion gallons, a 600 million decline.

214 million bushel decline in demand

Since one corn bushel can produce 2.8 gallons of ethanol, a 600 million decline in the ethanol mandate will translate to a 214 million bushel decline of corn use for ethanol. At current prices of ~$4.0 a bushel, the U.S. has consumed around 13.1 billion bushels a year (June 2010 to May 2012). A cut in the ethanol mandate would drive consumption lower, to about 12.88 billion bushels a year.

Average production meets demand (base case)

This year, we had a record year of production, amounting to 13.98 billion bushels of corn based on current USDA estimates. But this is unlikely to repeat soon. In a normal year throughout the same period we’ve been discussing, production has averaged about 12.88 as well—matching supply and demand. Given that current inventory levels are near where they were from 2010 to the first half of 2012, corn prices aren’t likely to fall like they did this year. They should find support at $4.00 as farmers cut plantation or demand emerges.

Potential risk

Lower corn prices and application rates are potential risks for fertilizer stocks like IPI, POT, AGU, MOS, and MOO over the next few months and quarters. But this may not just be an issue of a few quarters.

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