Ethanol Producers Face Increased Profit Margin Risks

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by: Biofuels

The ethanol market this week will focus on:
- The corn market ahead of Monday’s weekly Crop Progress report
- Gasoline prices, which continue to follow stocks and rallied fairly sharply last week, and
- Ethanol demand, which is strong at present due to the summer driving season and the fact that ethanol is still 92.5 cents per gallon cheaper than gasoline including the 45-cent blenders tax credit.

USDA reports indicate U.S. ethanol producers face increased profit margin risks

The ethanol-corn crush margin has fallen by 5 cents to 21.6 cents per gallon in the 1-1/2 weeks since the surprising USDA reports were released on June 30 that cut the new-crop planting acreage by 1% and cut old-crop June 1 ending stocks. The USDA last Friday then cut its 2010/11 carry-over estimate by 12.7% to 1.373 billion bushels and cut its 2009/10 carry-over estimate by 8% to 1.478 billon bushels. The drop in the ethanol-corn profit margin could have been much larger except that ethanol prices now show a much stronger correlation to corn prices than several years ago, allowing ethanol prices to follow corn prices higher. The 1-year rolling correlation for ethanol and corn prices currently stands at 0.62 versus only 0.07 in 2007. Nevertheless, the sharp two-week rally in corn prices raises the risks for ethanol producers if ethanol prices start to lose ground relative to corn prices due to record levels of ethanol production.

Ethanol production hits record high

The EIA weekly ethanol data released last Thursday indicated that U.S. ethanol production in the week ended July 2 rose by +2.8% w/w to post a new record high of 855,000 barrels per day. Moreover, inventories rose to a new record high of 19.921 million barrels. There is currently strong demand for fuel during the peak of the summer driving season. Nevertheless, there remains a risk for a significant bulge in inventories when summer demand starts to wind down in August.

Ethanol Market Action

August CBOT Ethanol futures prices last week rallied fairly sharply thanks to the 3.0% rally in corn prices and the 4.7% rally in gasoline prices. August Ethanol prices posted a new three-week high and closed the week up 4.5 cents (+2.9%) at $1.595 per gallon.

Ethanol/Gasoline

August gasoline futures prices recovered moderately last week and closed up 9.23 cents (+4.7%) at $2.07 per gallon. Bullish factors centered on the recovery rally in stocks and improved sentiment about global economic growth and fuel demand. The spread of July ethanol prices minus gasoline prices last week fell by 4.7 cents to -$47.5 cents.

Ethanol/Corn

Sep corn futures prices last week extended the previous week’s rally to post a new 2-month high and close up 11.0 cents (+3.0%) at $3.8350 per bushel. Corn prices continued to rally on the June 30 USDA reports showing 1% lower corn planting and smaller than expected June 1 corn ending stocks. Last Friday’s USDA WASDE report did not show as much of a cut as expected in the old-crop and new-crop carry-overs, which caused the corn rally to stall. The July ethanol-corn crush margin last week rose slightly by 0.2 cents to 21.6 cents per gallon, which was slightly above the recent 13-month low of 20.5 cents. Including DDG, the corn for ethanol crush margin rose by 0.2 cents to 49.2 cents/gallon.

Ethanol Calendar
- July 14: EIA Weekly Petroleum Status Report
- July 29: EIA Monthly Ethanol Report
- Aug 12: USDA WASDE Crop Supply-Demand
- September: EPA’s E15 decision due

Disclosure: No positions.