With the Republicans taking control of the House in January, it becomes more critical than ever that the ethanol tax measures that expire at the end of this year are extended in the lame duck session of Congress that will start next week. However, it is not clear whether Congress during the lame duck session will be able to extend the tax measures because there isn’t full agreement between Democrats and Republicans on how to extend the measures and since the Republicans still have filibuster power in the Senate to block legislation they don’t like. If the tax measures are not extended, the impact on the ethanol industry could be significant.
If there is no longer a 54-cent tariff on imported ethanol on Jan 1, then ethanol exports from Brazil will be more economically viable and could slowly supplant U.S. corn-based ethanol. If there is no longer a 45-cent excise tax credit for blenders, then ethanol loses that 45-cent price advantage and becomes less economically attractive relative to gasoline. That would likely result in a substantial decline in discretionary blending demand for ethanol, causing downward pressure on ethanol prices. The federal government’s Renewable Fuel Standard will remain in place and that requires that blenders to use 13.95 billion gallons of ethanol in 2011. However, the RFS requirement can also be satisfied with some of the 2 billion gallons worth of RIN credits that are overhanging the market rather than physical ethanol, meaning spot demand for ethanol may well fall substantially if the 45-cent tax credit expires.
Ethanol Market Action -- December CBOT Ethanol futures prices last week extended the 4-month rally to post a new 2-1/4 year high and close up 10.4 cents (+4.6%) at $2.346 per gallon. Bullish factors included the 5.9% rally in gasoline prices, the 1.0% rally in corn prices, optimism about the economy and fuel demand with QE2 and stronger-than-expected economic data, and broad strength in commodity prices with the weakness in the dollar. The weekly EIA report was supportive with ethanol production in the week ended Oct 29 at 865,000 barrels/day, down 1.7% w/w and down 1.8% from the Oct 15 record high of 881,000 bpd. Inventories rose slightly by 0.2% to 16.349 million bbl, but were still 18% below the July 2 record high.
Ethanol/Gasoline -- December gasoline futures prices last week rallied to a new 6-month high and closed the week up 12.06 cents (+5.9%) at $2.18 per gallon. Bullish factors included general commodity strength, the Saudi oil minister’s apparent upward revision in his target range to $70-90 from $70-80, and the 2.0% decline in U.S. gasoline inventories to 214.942 million bbl, which was only 4.9% above the 5-year seasonal average, the lowest figure since August. Dec ethanol last week closed at a 16.6 cent premium to gasoline, although ethanol remains 28 cents cheaper than gasoline after the 45-cent ethanol tax credit.
Ethanol/Corn -- December corn futures prices last Thursday posted a new 2-year high but settled back on Friday to close the week up 5.75 cents (+1.0%) at $5.8775 per bushel. Corn prices last week benefited from the general strength in commodity prices and from the ongoing tight corn supply situation. The Dec ethanol-corn crush margin last week rose by 8.3 cents to 24.7 cents/gallon. Including DDG, the Sep corn for ethanol crush margin rose by 8.3 cents to 59.8 cents/gallon.
- Nov 9: USDA WASDE Crop Supply-Demand
- Nov 10: EIA Weekly Petroleum Status Report
- Nov 29: EIA Sep Monthly Ethanol Report
- Mid-Dec: EPA’s E15 decision expected for 2001-06 model vehicles.
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Disclosure: No positions.