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Is there a Supply Imbalance coming? PEIX, AVRNQ, GPRE, ADM

|Includes:ADM, GPRE, Pacific Ethanol, Inc. (PEIX)

A Wall Street article today raised the specter of the industry re-creating a supply imbalance as idle plants ( such as PEIX) re-open, or near-completed facilities become online.

Everyone looks at the RFS demand jump from 2009 to 2010, and possibly an extended mandate for fuel mix from 10% ethanol to 15%    in the gasoline stream.  I would like to add a third demand argument to the 2010 scenario which will cause our supply and demand to be balanced.

By now, the lack of rain in India and the surplus of rain in Brazil  have caused world sugar demand to push Brazil to allocate sugarcane 60% sugar 40% ethanol.  This shift was signaled back in 2009 spring-summer when the early Indian production challenges arose.  But since,  sugar yield in Brazil have been less and  harvest of total sugarcane is less due to rain prolongation into December ( Dec. 22 is a key date for closing harvest in Brazil ).   Now ADD to this, the sugar yield from the first two weeks ( Dec 1 - 18) Indian harvest is 9.6% less than expected.

Australia's production, as 3rd  world sugar exporter, will also be short aprroximately 400K tones.

Net, everyone will be pulling on Brazil sugar and Brazil Ethanol will suffice for its own need but at a higher price.  The Price and Supply factors in Brazil will keep the ethanol export  flow to pre-committed contract levels. Since for ethanol, there is no long term futures contracts ( like for sugar). No need to commit to export EXPORT. Other nations, in need of ethanol, will just have to bid up the price.

So far, the US ethanol supply will  replace most of the exports from Brazil, since the US corn-based ethanol is cheaper than the sugarcane based Brazilian ethanol.   

Enclosed here is the early trend of export from Brazil. Note that this period ends in October.

BRAZIL´S ETHANOL EXPORTS (April through October, in 1,000 liters)

Country/Region 2008/2009   2009/2010    % change

Caribbean Basin 889,025       690,386       -22

European Union 828,336       664,842        -20

India                    52,037       317,675       +510

Japan                  144,019      206,402        +43

South Korea         69,886       184,428       +164

United States    1,242,703      152,424        -88

Nigeria                  60,771        72,221        +19

Switzerland             2,547         41,334      +1,523

Other                   110,624      192,988      +74

Total                  3,399,949   2,522,700      -26%

Source: Secex
Brad Addington,

Data above is April thru October, while the severe harvest shortfall was noticed in November/December. By my estimates, the US  in 2010  have to make up 2B liters or 500mil gallons shipped by Brazil to the Caribbean and the US.   Some demand from India, South Korea  might also flow to US supply base.   .

 A US policy question  might arise on the use of corn already produced. Mainly, an allocation of corn for food and then allowing  surplus above a reserve level to go to ethanol.  

US  ethanol production from idle and near-completion plants  seems to have a demand environment left open by Brazil tight 2010 supply.


Disclosure: Long PEIX, BIOF,