Industry Report Shows Ethanol Margins Are Steadily Increasing

For many ethanol producers pinched by the historically low margins in September, recent events are giving a huge boost to the industry now. Citigroup's (C) David Driscoll, probably the best out there when it comes to the ethanol industry issued a report Tuesday.

In it he said average ethanol margins rose 2 cents a gallon last week to 30 cents and have risen 26 cents over the past 10 weeks since bottoming at 4 cents a gallon back in late September. The to date mild winter weather has led to natural gas price reductions from a settlement of more than $8.02 per million BTU's on Nov. 26 to a settlement of $7.15 on Friday to $7.085 on Tuesday. Since most ethanol producers use natural gas to power plants, reductions here go right to the bottom line.

Demand has also held steady at higher than normal levels as ethanol supply for September increased modestly by three days to 26. This is well below the industry's average historical days of inventory level of 32 days. This tells us that ethanol production is currently being fully blended into gasoline.

For ethanol producers like Verasun (VSE) and Pacific Ethanol (PEIX), who have stopped expansion production, the large increase in margins ought to give boost to those plans again. For a large integrated producer like Archer Daniels Midland (ADM), who surprised investors last quarter with dramatically improved results despite a tough operating environment, news like this ought to assure investors this quarter looks to be a very strong one also.