October EPA Decision and the Impact on Ethanol Demand Outlook

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 |  Includes: ADM, ANDE, AVR, BIOF, CZZ, EPG, GPRE, GRH, GU, NBF, PABL, PEIX, VLO, VRNM
by: Biofuels

USDA Agriculture Secretary Tom Vilsack said last Friday that he expects the EPA to approve E15 (15% ethanol, 85% gasoline) for newer vehicles, although he added, “I don’t know if they will necessarily say it is appropriate for all vehicles.” EPA chief Lisa Jackson said that the EPA is on track to complete its testing on 2007- and later-model vehicles by late September and release a decision shortly thereafter. She said that testing on 2001-06 vehicles is on track to be completed by the end of November.

EPA approval of E15 would provide a strong demand boost for ethanol in coming months and years. However, some leaders in the ethanol industry would rather have across-the-board approval for E12 for all vehicles, rather than E10 for older model vehicles and E15 for newer vehicles, which may cause backlash from confused consumers and from fuel stations that will be faced with carrying and labeling two different blends of ethanol.

Ethanol Market Action - October CBOT Ethanol futures prices last week extended the 12-week rally to a total of 49%, posting a new 2-year high and closing up 17.7 cents (+9.0%) at $2.147 per gallon. Ethanol prices were boosted once again by corn prices, which soared by another 7.3% last week. Ethanol prices also continue to see support from the sharp drop in ethanol inventories in the past month, which are currently 10.3% below the peak seen in early July. The weekly EIA report showed that U.S. ethanol production in the latest week fell slightly by 0.3% to 872,000 barrels per day from the record level of 875,000 barrels seen in the week ended September 3. Nevertheless, the relatively low level of inventories indicates that strong demand is absorbing the near-record level of production.

Ethanol/Gasoline – October gasoline futures prices last Monday posted a 1-month high but then faded during the rest of the week to close 5.39 cents lower (-2.7%) at $1.9192 per gallon. Bearish factors included technical selling, doubts about fuel demand, and continued worries about high inventory levels. The sharp 9.0% rally in ethanol prices last week, compared with the 2.7% sell-off in gasoline prices, caused the spread of October ethanol prices minus gasoline prices to rise sharply by 23.1 cents to a 1-1/2 year high of 22.8 cents (see ethanol-gasoline charts on page 13). Ethanol is still 22 cents cheaper than gasoline including the 45-cent ethanol tax subsidy, but the narrower advantage of ethanol prices suggests that demand among blenders may fade a bit.

Ethanol/Corn – December corn futures prices last week continued higher to post a new 2-year high, extend the 12-week rally to a total of 50%, and close 35.00 cents higher (+7.3%) at $5.1325 per bushel. Corn prices continued higher last week as the market suspects that the corn supply situation will be even tighter than the USDA has so far estimated due to the hot summer, which was in the top 15% of hottest summers in the past century. The USDA on September 10 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 December ethanol-corn crush margin fell slightly by 1.1 cents to 14.5 cents/gallon. Including DDG, the September corn for ethanol crush margin fell by 1.7 cents to 49.6 cents/gallon.

Ethanol Calendar
- September 22: EIA Weekly Petroleum Status Report
- September 29: EIA July Monthly Ethanol Report
- October 8: USDA WASDE Crop Supply-Demand
- Early to mid October: EPA’s E15 decision expected for 2007+ model vehicles (early-December decision expected for 2001-06 models)

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