Tighter USDA Corn Situation Increases Profitability Risks for Ethanol Producers

by: Biofuels

The ethanol market this week will focus on:

  • The corn market where the focus remains on weather and corn yields and the extent of damage to crops in Russia and eastern Europe,
  • Gasoline prices, which continue to track U.S. economic data and the stock market, and
  • Whether ethanol demand can continue to absorb record production levels once the summer driving season winds down.

The USDA in last Thursday’s World Agricultural Supply & Demand Estimates (WASDE) report boosted its corn yield estimate by 0.9% to 165.0 bushels/acre from July, leading to a 0.9% increase in its corn production estimate to a record 13.365 billion bushels. However, the USDA also raised its use estimate by 1.0% from July, mainly because of a 5% increase in corn exports tied to the poor crops in Russia and eastern Europe. The net result was a 4.4% cut in the U.S. ending stock estimate to a 6-year low of 1.312 billion bushels. That left the U.S. stocks/use ratio at a tight 9.7%, 3.6 percentage points below the 5-year average and the fourth tightest level in the past two decades. While ethanol prices have been able to rally with corn prices thus far, the tight U.S. corn supply situation clearly increases the profitability risks for ethanol producers.

Ethanol Market Action - September CBOT Ethanol futures prices last week extended the 7-week rally to post a new 7-month high and close up 4.5 cents (+2.6%) at $1.768 per gallon. Bullish factors included the 1.7% rally in corn prices during the week as well as strong demand for ethanol in general. Ethanol prices also found some support from Wednesday’s weekly EIA report showing that ethanol production in the week ended August 6 fell by 0.8% to 866,000 barrels/day from the previous week’s record high of 873,000 bpd. In addition, ethanol inventories fell mildly by 1.0% to 19.343 million barrels where they were 2.9% below the record high of 19.921 million bbl posted in early July. Ethanol prices last week were able to shake off the sharp sell-off in gasoline prices.

Ethanol/Gasoline – September gasoline futures prices last week fell sharply to post a new 3-month low and close 17.31 cents lower (-8.2%) at $1.9396 per gallon. The main bearish factor was the FOMC’s downgrade of US economic growth, which caused pessimism about US fuel demand. The sharp sell-off in gasoline prices caused the spread of September ethanol prices minus gasoline prices last week to rise by 21.8 cents to -17.2 cents, the narrowest spread in 6 months, although ethanol is still 62 cents cheaper than gasoline including the 45-cent ethanol tax subsidy.

Ethanol/Corn – September corn futures prices last week consolidated below the recent 7-month high and closed the week up 6.75 cents (+1.7%) at $4.1175 per bushel. Corn prices continued to see strong upside support from the drought and hot weather in Russia and eastern Europe, which has damaged crops. In addition, abnormally hot weather in the U.S. has the potential to curb U.S. corn yields. Ethanol prices last week rallied by more than corn prices, allowing the Sep ethanol-corn crush margin to rise by 2.1 cents to 29.7 cents/gallon, which was well above the recent 13-month low of 20.1 cents per gallon. Including DDG, the Sep corn for ethanol crush margin rose by 2.1 cents to 63.6 cents/gallon.

Ethanol Calendar
- Aug 18: EIA Weekly Petroleum Status Report
- Aug 30: EIA June Monthly Ethanol Report
- Sep 10: USDA WASDE Crop Supply-Demand
- September: EPA’s E15 decision due

Disclosure: No Positions