Weekly CME Ethanol Outlook Report: Brazilian Ethanol Producers Expect to Profit

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by: Biofuels

Brazilian Sugar Lobby Pushes to Displace US Ethanol Producers

The Brazilian sugarcane association, known as UNICA, is seeking to capitalize on anger by US voters and politicians about subsidies of any kind by issuing a video (see news link on p.2 of full PDF report) purporting to show how the US taxpayers could save $6 billion by ending the 54-cent ethanol tariff and 45-cent blender credit, which expire at the end of this year.

If Congress allows those tax measures to lapse, which is possible with the current gridlock in Washington, Brazilian ethanol producers expect to capitalize on the US mandate for 13 billion gallons of ethanol usage this year by exporting large quantities of Brazilian sugar-based ethanol to the US, displacing corn-based ethanol produced in the US. Large-scale Brazilian exports to the US would likely cause widespread devastation among US ethanol producers and a sharp drop in corn demand and corn prices.

Ethanol Market Action

October CBOT Ethanol futures prices fell sharply during mid-week but then recovered somewhat on Friday, finally closing the week down 10.7 cents (-5.0%) at $2.04 per gallon. Ethanol prices fell sharply during mid-week on heavy long liquidation pressure and on weak gasoline prices. However, ethanol prices were able to stage a mild recovery on Friday with the rally in gasoline prices, corn prices, and the stock market. Last week was the first time that ethanol prices have not been able to keep up with the rally in corn prices in what could be a bad omen for ethanol-producer profit margins.

In a supportive factor for ethanol prices, last Wednesday’s weekly EIA report showed a 2.5% decline in ethanol production in the week ended Sep 17 to 850,000 barrels/day, which was 2.6% below the record high of 875,000 bpd posted just two weeks earlier. In addition, ethanol inventories fell by 2.0% to 17.506 million barrels, which was the lowest level since January and was 12.1% below the record high of 19.921 million barrels posted in July.

Ethanol/Gasoline

October gasoline futures prices faded early last week but then rallied on Friday to close 2.79 cents higher (+1.5%) at $1.9471 per gallon. Gasoline prices were able to rally last Friday on the sharp sell-off in the dollar index and the solid 2.1% rally in the S&P 500 index, which reflected an improved economic outlook. Gasoline prices in general, however, continue to see pressure from the high petroleum inventory situation. The weakness in ethanol prices last week, combined with the small rally in gasoline prices, caused the spread of October ethanol prices minus gasoline prices to fall by 13.5 cents to 9.3 cents. Still, ethanol is 36 cents cheaper than gasoline including the 45-cent ethanol tax subsidy.

Ethanol/Corn

December corn futures prices last Friday rallied sharply to edge to a new 2-year high, extend the 12-week rally to a total of 52.5%, and close 8.50 cents higher (+1.7%) at $5.1325 per bushel. Corn prices ran into long liquidation pressure early in the week but then rallied sharply last Friday on the weak dollar and on heavy rain and flooding in southern Minnesota that is likely to reduce yields. Last week’s 1.7% rally in corn prices contrasted with the 5.0% decline in ethanol prices, causing the December ethanol-corn crush margin to fall by 3.5 cents to 11.0 cents/gallon. Including DDG, the September corn for ethanol crush margin fell by 3.5 cents to 46.1 cents/gallon.

Ethanol Calendar

  • September 29: 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)

Disclosure: No positions