CRB/CME Group Weekly Ethanol Report: Rising U.S. Ethanol Exports Produce Some Controversy

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

U.S. ethanol exports in January through September 2010 totaled 251 million gallons, according to the DOE, which was more than twice the 2009 level. Ethanol exports so far in 2010 amounted to only 2.6% of U.S. production, but nevertheless are causing controversy because the U.S. 45-cent ethanol excise tax subsidy is being claimed by some blenders prior to export. The European ethanol industry protests that (1) the U.S. excise tax subsidy amounts to unfair competition against European ethanol producers, and (2) the tax subsidy when used for exports is not being used for its intended purpose of encouraging domestic U.S. consumption of ethanol to reduce America’s reliance on imported oil. However, the amount of subsidized ethanol that gets to Europe appears to be miniscule. Exporters can only claim the credit if they mix ethanol and gasoline prior to export, not if they export pure ethanol. Also, of the 251 million gallons in exports, only 58 million gallons were exported to Europe. The other destinations for U.S. ethanol exports were Canada with 75 million gallons, UK (10 mln gal), UAE (5 mln gal), and Saudi Arabia (0.17 mln gal).

Ethanol Market Action -- Dec ethanol futures prices last week fell to a new 5-week low and closed 3.5 cents lower at $2.104 per gallon. Bearish factors included continued long liquidation pressure after the July-Oct rally, the 2.5% decline in corn prices, the 0.6% decline in gasoline prices, and the weekly DOE report.

Weekly DOE report is bearish -- Last Wednesday’s weekly DOE ethanol report was bearish with a record high of 895,000 bbl/day of ethanol production, up 3.5% in the past two weeks. More importantly, ethanol inventories rose by 4.1% to 16.718 million bbl, which was the largest weekly increase since mid-June. The report indicated that demand was not strong enough during the week to fully offset the record production level. Ethanol prices will obviously be negatively impacted if that situation continues with rising inventories.

Ethanol/Gasoline -- December gasoline futures prices last week consolidated below the recent 7-month high and closed the week slightly lower by 1.39 cents at $2.1960 per gallon. Gasoline prices last week were undercut by long liquidation pressure and the slightly higher +0.5% close in the dollar index. However, gasoline prices received underlying support from the weekly DOE report showing a 2.7 million bbl decline in gasoline inventories, which left gasoline inventories only 2.7% above their 5-year seasonal average, the tightest level since April 2010. Dec ethanol prices last week fell by slightly more than gasoline prices, causing the spread of ethanol prices minus gasoline prices to fall to a -9.2 cent discount, which equates to a 63 cent discount including the 45-cent ethanol tax credit.

Ethanol/Corn -- Dec corn futures prices last Friday edged to a new 6-week low and closed the week down 13.25 cents at $5.2075 per bushel. The main bearish factor was continued long liquidation pressure after the very sharp July-October rally to a 2-year high. Virtually the entire U.S. corn crop is now in the bin with no further threats from weather. The market appears to have already fully discounted the tight supply situation with the stocks/use ratio of 6.2%. The Dec ethanol-corn crush margin last week rose by 1.2 cents to 24.4 cents/gallon. Including DDG, the Sep corn for ethanol crush margin rose by 1.2 cents to 59.5 cents/gallon.

Ethanol Calendar
Nov 24: 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