ETHANOL PRICING ISSUES FOR 2008

Recent actions on the new Energy Bill have created long term optimism for ethanol. But what can be expected for ethanol pricing and profitability for 2008? No one knows for sure, of course, but the reason for this note is to highlight some of the issues key to determining what might happen with ethanol pricing in 2008. Again, while long run prospects for ethanol look good, ethanol pricing could experience some instability and pressure for lower prices in 2008. Over a long history, ethanol prices have tracked pretty well gasoline prices (Figure 1). Since 1982, ethanol typically was priced higher than gasoline because ethanol had value not only directly as a fuel, but also as an additive providing octane and oxygen to the gasoline-ethanol blend and because of subsidies. Since 2005, not only has the average spread fallen, but also the range of spreads over the course of a year is much greater, reflecting more volatile prices for gasoline and ethanol. (For example, the high spread reached $1.36 per gallon in June 2006, but fell to a negative $0.45 in October 2007. The recent volatility in ethanol prices is likely to continue into 2008, suggesting that players in the market need to be attentive to market conditions. At least three factors merit special consideration: 1) infrastructure constraints, 2) size of the E10 and E85 markets, and 3) size of the market potential compared with the capacity expansion. The interplay among these factors all point to downward pressure on ethanol prices for 2008