Colorado Corn

By Steve Porter

November 20, 2008 --
A slide in the demand for gasoline in recent months has resulted in the price of unleaded at the pump dipping below $2 for the first time in years and nearly equaling the cost of E85 corn-based ethanol.

The price difference at the few stations in Northern Colorado that sell both unleaded gas and E85 was about 10 cents per gallon on Nov. 13. Normally, the price advantage for E85 is closer to 50 cents or more.

That difference has been an incentive for consumers to buy flex-fuel vehicles designed to use either gasoline or E85, a move encouraged by the ethanol industry to stimulate automakers to produce more flex-fuel vehicles and for more stations to offer the fuel.

But the current situation is giving corn industry observers and ethanol producers some cause for concern.

Mark Sponsler, director of Colorado Corn in Greeley, said E85 as an alternative fuel only becomes truly competitive when the price of a barrel of oil is $60 or more. With oil selling for around $60 per barrel or less recently, that competitive advantage has begun to erode.

The situation was exacerbated for ethanol producers last summer when the price of corn topped $6 per bushel, Sponsler noted, but has since slid back down to a little over $3 per bushel.

"Ethanol producers still digesting $6 corn are being squeezed a little bit right now, but with cheaper corn it should make it more competitive again with $60 crude," he said. "It's those two markets that really operate independently that motivate consumers as to whether they'll buy ethanol."

Price not only difference

Sponsler said he hopes consumers don't simply look at the price differential when choosing between E85 and gasoline. "There's a whole host of other significant reasons to buy ethanol over petroleum, including energy independence, national security and transferring trillions in wealth to countries that want to kill us," he said.

The ethanol market has been a boon to corn farmers in recent years. It's also been a rollercoaster ride as corn prices have gone up and down depending on ethanol demand and production.

Sponsler said that's had a negative impact on some farmers. "Corn is now trending down to around $3.25 (per bushel)," he said. "So that's good news for the ethanol industry but bad for producers because it's probably $1 below the cost of production."

Dan R. Sanders, manager of the Front Range Energy LLC ethanol production plant in Windsor, said the closing of the gap between E85 and unleaded gasoline has not had a major effect on his facility. Sanders said the primary market for Front Range Energy ethanol - and most producers - is for the 10 percent blend added to gasoline, particularly in states like Colorado that require the ethanol blend in winter months to reduce air pollution.

"E85 is a relatively small part of the overall picture," he said. "It's a very good fuel if you have the ability to use it."

Ethanal, gasoline linked

Sanders said the fact that most ethanol is sold as a blend with gasoline means that the two are actually tied together in the marketplace. "As goes the demand for gasoline, so goes the demand for ethanol," he said.

Sanders said he believes the demand for gasoline for the upcoming holiday season will raise the price of a barrel of oil well above $60 again, improving the cost differential between E85 and unleaded. Sponsler also thinks the price of gasoline won't stay below $2 for long.

"I'm hearing expectations for oil are going to go significantly higher after the first of the year, so we'll be looking at a fairly small slice of time when it's about the same price," he said.

"I think as long as gas sells for $2 or $2.50 a gallon (E85) ethanol has a solid role, and if oil (stays) above $60 a barrel ethanol will thrive."