Tight Corn Inventories Raise Profit Risks for Ethanol Producers

by: Biofuels

The USDA on September 10 cut its US corn production estimate by 1.5% due to a lower corn yield from the recent hot weather. The lower crop size produced a 15% cut in the US ending stocks estimate to a 6-year low of 1.116 billion bushels. That ending stocks level represents only 8.3% of corn usage, the tightest stocks/use ratio in 14 years. The global inventory situation is also relatively tight with a stocks/use ratio of a 4-year low of 16.3%, 0.7 points below the 5-year average.

The bigger picture suggests continued high corn prices considering that even though US farmers have produced two record-sized corn crops in a row, corn inventories are at extremely tight levels due to strong demand. The strong demand level is likely to keep a strong bid under corn prices. In addition, there is a risk for a big corn price spike if there are any growing season problems during the upcoming South American corn season or next summer’s US corn season.

Luckily for US ethanol producers, demand for ethanol has recently been very strong and ethanol prices have been able to follow corn prices higher. This has preserved ethanol producers’ profit margin for the time being. However, the 39% rally in corn prices raises the risks for ethanol producers if ethanol prices should suddenly lose ground now that the summer driving season is over or if the market is disappointed with the EPA’s E15 decision later this month.

Ethanol Market Action - October CBOT Ethanol futures prices last week extended the 11-week rally to a total of 36%, posting a new 2-year high and closing up 5.36 cents (+2.8%) at $1.9731 per gallon. Ethanol prices were led higher by corn’s 3.0% rally and were finally joined by a 3.0% rally in gasoline prices. The weekly EIA report showed that ethanol inventories in the week ended September 3 rose by 1.0% to 17.735 million barrels but that was still 11.0% below the July 2 record high at a relatively tight level. On the bearish side, production rose by another 2.2% to add to the previous week’s 2.5% gain and reach a new record high of 875,000 barrels per day.

Ethanol/Gasoline – October gasoline futures prices last week gained some upward momentum to post a new 1-month high and close the week up 5.36 cents (2.8%) at $1.9731 per gallon. Bullish factors included the recent improvement in the economic outlook and some technical short-covering with the new 1-month high. Still, crude oil and product inventories remain very high. The spread of October ethanol prices minus gasoline prices last week rose by 3.2 cents to -0.3 cents, although ethanol is still 45 cents cheaper than gasoline including the 45-cent ethanol tax subsidy.

Ethanol/Corn – December corn futures prices last week continued higher to post a new 1-3/4 year high, extend the 11-week rally to a total of 39%, and close 13.75 cents higher (+3.0%) at $4.7825 per bushel. Corn prices continued higher last week after the USDA cut its yield estimate to 162.5 from 165.0 bushels per acre, which resulted in a 1.5% cut in the crop size. The market suspects another yield cut may be in store in next month’s USDA report. The Dec. ethanol-corn crush margin rose slightly by 0.3 cents to 15.6 cents/gallon. Including DDG, the September corn for ethanol crush margin rose by 0.3 cents to 51.4 cents/gallon.

Ethanol Calendar
- Sep 15: EIA Weekly Petroleum Status Report
- Late Sep: EPA’s E15 decision due
- Sep 29: EIA July Monthly Ethanol Report
- Oct 8: USDA WASDE Crop Supply-Demand

Disclosure: No positions