With corn prices the lowest in years, the question arises whether farmers who invested in ethanol plants are finding it an effective hedge. Retired Iowa State University ag economist Don Hofstrand analyzed the question in the latest AgMRC Renewable Energy & Climate Change Newsletter. “During 2013, and so far in 2014, it can be seen that the ethanol hedge has worked as expected.  As the return to corn production declined, the return on the ethanol investment rose, maintaining total return close to the 2012 level.  Similar results can be seen during the 2006 through 2008 time period.  Initial high return on the ethanol investment supplemented low corn returns.  As the return from corn production increased, the return on the ethanol investment declined, leaving total return relatively strong.”

It is not a guaranteed hedge, however. Hofstrand found that the ethanol hedge failed during the 2009 to 2010 period. While the ethanol hedge worked during periods of generally strong ethanol prices, it didn’t in that two-year period. Thus, the future viability of the ethanol hedge depends on the future ethanol price. “Production and consumption of ethanol remain in relative balance with a slight increase in net exports,” Hofstrand wrote.  “This has resulted in a gradual reduction in ethanol stocks which has helped support ethanol price. However, future ethanol usage and price remains clouded due to the ‘blend wall’ and other transportation fuel issues.”

To view the entire analysis and accompanying charts, click here.