Ethanol Standards Take Bite From Corn

By IAN BERRY

CHICAGO -- California's decision to adopt new-vehicle fuel standards to reduce greenhouse-gas emissions will have little short-term impact on corn-ethanol demand, but in the long term it is seen hurting the biofuel.
The state's Air Resources Board approved the measure by a 9-1 vote Thursday. The regulation will require a lower "carbon intensity" in fuels starting in 2011.
It also includes land-use changes due to ethanol production in assessments of ethanol's carbon intensity, a facet of the rule fiercely opposed by the ethanol industry.
The change would mean that emissions stemming from crop production, including the destruction of forestland or pasture to make way for crops, would be added to ethanol's carbon footprint. Ethanol industry officials argued that other fuels don't face the same standard.
For instance, the industry has pointed out it doesn't calculate emissions from military action related to protecting crude-oil supplies.
The decision is widely seen as a psychologically bearish influence on the Chicago Board of Trade corn market. Ethanol usage accounts for roughly a third of the U.S. corn crop, and ethanol demand helped push CBOT corn futures to record highs in 2008, although ethanol supporters say it was only a minor factor.
Nearby-month May corn closed at $3.77 per bushel Friday, compared with highs last year of around $8.
The decision is a long-term roadblock that indicates "less of a bright future for corn-based ethanol," said Michael Swanson, agricultural economist with Wells Fargo.

"We went from having endless ethanol growth to having: 'hmm, what kind of future do we have there anyway?'" Mr. Swanson said.
Fortis Bank said in a Friday research note that corn traders are concerned about the rule's effect on demand, "but there is likely to be a fierce debate over the details in the meantime." Mr. Swanson said it's probably "several court cases and wranglings from being final."
California's View
The chairwoman of California's Air Resources Board, Mary Nichols, to soothe the ethanol industry, said in a letter to retired U.S. Gen. Wesley Clark, who is heading an ethanol industry group, that the new standard "supports the market for corn ethanol in California over the next decade at least."
Gen. Clark's group, Growth Energy, says that the proposal unfairly singles out corn ethanol, and he criticized the rule as unfair.
Some corn traders noted that the rule isn't supposed to go into effect until 2011. It also will be implemented incrementally, with a goal of cutting the carbon content of the fuels sold in California by 10% by 2020.
"I think the impact today, next week, next month is minimal," said Vic Lespinasse, analyst for grainanalyst.com. "It could have an impact down the road."
Still, the decision is a reminder that "corn ethanol is a passing phase" in a transition to the next generation of biofuels, Mr. Lespinasse said. Farmers will be producing less corn for ethanol in 20 years than they do now, he said.
Other States Coming?
Some traders also said that California is seen as a trend-setter for environmental policy, and that several other states have similar proposals in the pipeline.
The ethanol market has broader economic concerns, analysts said. Chad Henderson, analyst for Prime Ag Consultants, said that corn traders see ethanol demand as more politically motivated than economically driven.
He said he isn't anti-ethanol or pro-ethanol, "but at some point down the road, you would think ethanol needs to stand on its own two feet economically."
Mr. Swanson said that main problems facing ethanol are weak demand and improved fuel efficiency, which could cause a cut in ethanol demand even as it increases market share. He said there is little bullish news emerging from the ethanol market for corn traders.
"There are a lot of people in the ethanol industry who are hoping for a strong corn crop and a gloomy price finish so they can lock up a lot of good supply for next year," Mr. Swanson said. "Why wouldn't they? Corn buyers usually like cheaper prices."
Traders point out that over the shorter term, many expect the Obama administration to increase the minimum blend rate for ethanol in gasoline up to as high as 15% from the current level of 10%.
Write to Ian Berry at ian.berry@dowjones.com