CRB/CME Group Weekly Ethanol Report: Ethanol Prices Continue to Closely Follow Corn Prices

by: Biofuels

Ethanol prices continue to closely follow corn prices -- Corn prices last week fell sharply by 9.1% and took ethanol prices down by a similar 8.8%. Luckily for the ethanol industry, ethanol prices have tracked the sharp 76% rally seen in corn during June-Nov fairly closely with a 0.69 daily correlation and an overall 62% rally. This is in sharp contrast to the 310% corn rally in 2006-08 when ethanol prices rallied by only 55% over that period with a very low correlation of 0.08. The weakness in ethanol prices in 2006/08 relative to corn costs caused the ethanol-corn crush margin to turn to a loss of more than $1 per gallon in mid-2008 and caused widespread bankruptcies in the industry. Ethanol prices now track corn prices much more closely because ethanol producers use a big 38% of the U.S. corn crop and market participants know that if ethanol prices do not follow corn prices higher, there will again be widespread ethanol bankruptcies and corn use and prices will plunge, eventually bringing corn and ethanol prices back into line.

Ethanol Market Action -- December ethanol futures prices last week fell sharply from the recent 2-year high to post a new 1-month low and close the week down 20.7 cents (-8.8%) at $2.139 per gallon. Bearish factors centered on the 9.1% plunge in corn prices and technical long liquidation pressures after the 62% rally seen since June. Dec ethanol prices have so far retraced only 26% of that rally. The 1.4% rally seen in gasoline prices last week provided some underlying support for ethanol prices.

Weekly DOE report is mixed -- Last Wednesday’s weekly DOE report was mixed. Ethanol production in the week ended Nov 5 rose by 1.4% to 877,000 barrels per day where it was only 0.2% below the record high of 881,000 bpd posted Oct 15. However, demand remained strong and inventories during the week fell by 1.8% to 16.061 million barrels, where they were just 0.2% above the 1-year low of 16.034 million barrels posted Oct 15.

Ethanol/Gasoline -- December gasoline futures prices last week rallied to a new 6-1/2 month high but then faded on Friday to close the week only 2.99 cents higher (+1.4%) at $2.2099 per gallon. Gasoline prices saw general support last week from OPEC’s recent push for higher prices and last Wednesday’s third consecutive weekly decline in US gasoline inventories to 3.6% above the 5-year average, which was a 7-month low. Gasoline prices on Friday faded due to weakness in U.S. (-1.2%) and Chinese (-6.2%) stocks and the 2.0% rally in the dollar index seen during the week. Dec ethanol prices last week fell back below gasoline prices to a 7.1 cent discount, which means ethanol is 52 cents cheaper than gasoline after the 45-cent ethanol tax credit.

Ethanol/Corn -- December corn futures prices last Tuesday posted a new 2-year high but then fell sharply during the week to close 53.75 cents lower (-9.1%) at $5.34 per bushel. The USDA last week cut its yield estimate to 154.3 from 155.8 bushels per acre, cut the crop size to 12.540 from 12.664 billion bushels, and cut the ending stocks figure to 827 from 902 million bushels, producing a very tight stocks/use ratio of 6.2%. However, the report was generally in line with market expectations and heavy long liquidation pressure ensued. The Dec ethanol-corn crush margin last week fell by 1.5 cents to 23.2 cents/gallon. Including DDG, the Sep corn for ethanol crush margin fell by 1.5 cents to 58.3 cents/gallon.

Ethanol Calendar
- Nov 17: EIA Weekly Petroleum Status Report
- Nov 29: EIA Sep Monthly Ethanol Report
- Mid-Dec: EPA’s E15 decision expected for 2001-06 model vehicles.
- Dec 10: USDA WASDE Crop Supply-Demand

Disclosure: No positions