Starting with the question, “What price of corn will make E85 competitive?” University of Illinois economists Scott Irwin and Darrel Good examined the breakeven prices of E85, ethanol and corn. 

While $7 corn at current retail gasoline prices doesn’t favor E85 expansion, if the 2013 corn crop comes through, they write, “it is feasible that corn prices could decline below the breakeven price for E85 if retail gasoline prices remain near current levels. If so, expanding E85 consumption could help expand the ethanol blend wall and add to the demand for corn to be processed into ethanol.”

The two agriculture economists have been publishing an ongoing series of FarmDocDaily posts examining multiple issues around the renewable fuels standard. In this post they look closely at the retail price of gasoline, price variations and the relative value of E85. “While the logic for an energy breakeven level of E85 pricing is straightforward, there is uncertainty about whether consumers will in fact require a higher or lower discount to incentivize greater use of E85,” they add.

The economic model factors in the wholesale-retail spread, the wholesale price of ethanol at Chicago need for a breakeven wholesale price of E85, plus the breakeven price of corn at an ethanol plant. “For a change of 10 cents per gallon in the retail price of gasoline, then, the breakeven price of corn changes by 26.5 cents per bushel.”  On June 3, the average retail price of gasoline on June 3 was $3.88 per gallon, implying a breakeven price of corn of $5.24 per bushel. “In other words, if the price of corn is $5.24 and the pump price of gasoline is $3.88 then E85 can be priced at its energy equivalent value and everyone from ethanol producers to gasoline consumers just breaks even.”

While a drop in corn prices from a good corn crop would favor more E85 consumption, the economists add that the size of the E85 market could still be constrained. This is due to the limited number and lack of concentration of refueling stations, even though some 11 million vehicles in the U.S. are flex-fuel. “It appears that increasing E85 consumption above 600 million gallons will require additional infrastructure investments. This will take time and likely limits the size of E85 use through at least 2014,” they conclude.