EPA May Increase Ethanol Blend to 11%, Morgan Stanley Says

If the US economy becomes more alcoholic, corn demanda will continue to expand to levels more and more difficult to reach without leaving less land for other crops.... Another side of the Malthusian situation.

Nov. 30 (Bloomberg) -- The U.S. Environmental Protection Agency may allow the percentage of ethanol in gasoline to increase to 11 percent, analysts at Morgan Stanley & Co. said in a report today.

The EPA is expected to decide by tomorrow on an ethanol industry request to allow the ratio of ethanol in gasoline to rise to 15 percent from 10 percent. Growth Energy, an ethanol industry trade group, filed the request in March.

“While we are maintaining our long-held view that U.S. ethanol blend levels will ultimately migrate well north of the current 10 percent, we do not expect a material increase in the blend rate as a result of tomorrow’s EPA decision,” Morgan Stanley analysts Vincent Andrews, Robert Wertheimer and Megan Davis wrote.

Raising the blend ratio is a source of contention between the industry, oil refiners and automakers. Growth Energy filed the waiver request to lift demand for an industry that’s been battered by volatile corn and fuel prices. At least 10 companies have sought bankruptcy protection since last year, including VeraSun Energy Corp. and Aventine Renewable Holdings Inc.

The analysts said the EPA could allow refiners to sell gasoline that contains 11 percent ethanol until it determines the impact E-15 would have on engines.

“We would see this as a signal that the EPA is willing to let ethanol blend levels go higher over time assuming that a thorough data analysis concluded that there was no meaningful risks to such action,” Morgan Stanley said.

Court Resolution

The agency could also leave the current blend level unchanged, signaling that it won’t allow the ratio of ethanol in gasoline to surpass 10 percent, the analysts said. The decision is likely to be contested in court, according to the report.

Archer Daniels Midland Co., the second-biggest U.S. ethanol producer, and agricultural companies such as Monsanto Co. and Deere & Co. could surge if the EPA allows the higher formula, the analysts wrote.

Poet LLC, ADM, Valero Energy Corp. and Green Plains Renewable Energy Inc. are the largest ethanol producers.

To contact the reporter on this story: Mario Parker in Chicago at 5927 or mparker22@bloomberg.net.