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Ethanol Industry Faces Headwinds
CNBC.com | November 11, 2011 | 04:28 PM EST

Another proposal, more worrisome to the industry, would reduce the amount of ethanol required by the Renewable Fuel Standard when corn supplies are tight. The purpose of the proposed legislation is to ensure supplies are amply available for feed corn.

The tax credits help determine what the price of ethanol can be relative to gasoline, but the Renewable Fuel Standard “means ethanol will either be or will not be demanded,” says Elizabeth Collins, a Morningstar analyst.

In a recent report, JPMorgan analysts Ann Duignan and Michael Shlisky say the bill, if it passes, could lead to a significant drop in corn prices, particularly in the months leading up to November, when the government would assess the “stocks-to-use” ratio of corn supplies. A stocks-to-use ratio is a measure of a supply-and-demand relationship, which in this case would be between corn stocks and their use for feed, fuel, and exports, among other things.

Under the legislation , which was introduced by Rep. Bob Goodlatte, R-Va., and Jim Costa, D-Calif., in the U.S. House of Representatives, a stocks-to-use ratio of below 10 percent would allow the U.S. Department of Agriculture to lower the Renewable Fuel Standard (RFS) for ethanol in the following year on a sliding scale by as much as 50 percent.

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