<

Scaled-back ethanol mandate bodes poorly for fertilizer stocks

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

Weak US gasoline consumption hurts ethanol, crops, and fertilizers

Policies

The ethanol mandate set in 2007 and the Energy Policy Act of 2005 were signed by the government to make the United States less reliant on gasoline, oil companies, and foreign imports, and to develop alternative fuel sources. These policies were put in place on the view that oil prices were rising and the amount of U.S. motor gasoline demand would continue to grow forever.

US Motor Gasoline ConsumptionEnlarge Graph

Motor gasoline demand continued to rise over the next two years as economic growth continued and people traveled more amid the weakening housing and financial sectors.

Motor gasoline consumption 

Since 2007, motor gasoline consumption has fallen in the United States due to reasons like sluggish employment, fuel economy, and alternative fuels. Since hitting a peak of 9.29 million barrels a day in 2007, consumption has gradually fallen. In 2013, analysts expect an estimated 8.73 million barrels of consumption. But for 2014, that’s expected to reverse down to 8.69 million barrels, according to the EIA (Energy Information Administration).

Employment and fuel economy

While we’re seeing the unemployment rate fall, total employment figures for the number of people available to work haven’t returned. With oil prices high and the average U.S. citizen’s budget tight, car manufacturers have focused on selling more fuel-efficient cars amid compliance with government standards. Last year, the Obama Administration finalized fuel economy standards equivalent of 54.5 mpg (miles per gallons) for cars and light-duty trucks by model year 2025, up from a past standard of 35.5 mpg by 2016.

Low gasoline demand is expected

As long as fuel economy continues to improve, investors can expect lower demand for gasoline. Lower gasoline demand and a U.S. energy boom that’s limiting oil price gains will keep the amount of ethanol used to blend with gasoline capped. This is long-term negative for crop prices and fertilizer demand, and it’s a possible reason companies and ETFs like Agrium Inc. (AGU), Mosaic Co. (MOS), Potash Corp. (POT), Intrepid Potash Inc. (IPI), and the Market Vectors Agribusiness ETF (MOO) will underperform overall.

The Realist Discussions