The ethanol market this week will focus on:
- The corn market ahead of this Thursday’s key USDA Crop Production and WASDE reports.
- Gasoline prices, which closed lower last week on the weaker-than-expected payroll data.
- And whether ethanol demand can continue to absorb record production levels once the summer driving season winds down.
Ethanol producer profit margins are being saved by strong ethanol-corn correlation
Ethanol prices have soared by 32.7 cents or 23% in the past 6 weeks, mainly because of the 27% rally in corn prices. Ethanol over the past year has shown a fairly high correlation of 0.63 with corn prices, thus allowing ethanol prices to rally in sympathy with corn and maintain producer profit margins. This contrasts sharply with corn rally in 2007/08 when ethanol prices failed to rally with corn and led to big losses and bankruptcies in the ethanol industry. At the peak of the corn rally in June 2008, ethanol prices showed a correlation of only 0.28 with corn prices. What’s different now is that ethanol is using a higher 35% of the corn crop and market participants are aware that if ethanol prices don’t follow corn prices higher, there will be another round of bankruptcies and a collapse in ethanol production, thus eliminating a major source of corn demand and leading to lower corn prices.
Ethanol Market Action
September CBOT Ethanol futures prices last week rallied sharply to post a new 6-1/2 month high and close the week up 5.7 cents (+3.4%) at $1.723 per gallon. Bullish factors included the 3.1% rally in corn prices and the 1.4% sell-off in the dollar index, which boosted commodity prices in general.
Ethanol production hits record high
Ethanol prices last Wednesday were able to shake off the EIA’s weekly report showing that ethanol production in the week ended July 30 soared by 7.0% w/w to a new record high of 873,000 barrels per day. Yet inventories rose only 0.1% on the week to 19.541 mln barrels.
September gasoline futures prices last Wednesday posted a new 3-month high but then sold off on Friday on the weaker-than-expected U.S. payroll report and closed 0.97 cents lower (-0.5%) at $2.1127 per gallon. With last week’s relative strength in ethanol prices, the spread of September ethanol prices minus gasoline prices last week rose by 6.7 cents to -$39.0 cents, which was the narrowest spread in 2-1/2 months, although ethanol is still 84 cents cheaper than gasoline including the 45-cent ethanol tax subsidy.
September corn futures prices last week rallied sharply to post a new 7-month high and close the week up 12.25 cents (+3.1%) at $4.05 per bushel. Corn continued to see strong upside support from the drought and hot weather in Europe and Russia, which has damaged all crops. Wheat prices showed a particularly sharp rally last week after Russia announced an export ban on grains as it tried to conserve its reserves and keep domestic prices from rallying too far. Grain prices settled back on Friday after Russian officials softened the export ban. Ethanol prices kept up with the corn rally last week and the Sep ethanol-corn crush margin rose by 1.3 cents to 27.7 cents/gallon, which was mildly above the recent 13-month low of 20.1 cents per gallon. Including DDG, the Sep corn for ethanol crush margin rose by 1.3 cents to 61.5 cents/gallon.
Aug 11: EIA Weekly Petroleum Status Report
Aug 12: USDA WASDE Crop Supply-Demand
Aug 30: EIA June Monthly Ethanol Report
September: EPA’s E15 decision due
Disclosure: No positions