Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

U.S. ethanol production is likely peaking as industry hits capacity limit

|Includes:Archer Daniels Midland Co. (ADM), ANDE, AVR, BIOF, CZZ, EPG, GPRE, GRH, GU, NBF, PEIX, VLO, VRNM

The ethanol market this week will focus on:

  • corn prices where Monday’s USDA weekly Crop Progress report is likely to show a continued surge in planting progress, which will boost the chances for a record corn yield this year,
  • gasoline prices, which are coming into this week on a strong note after last Friday’s new 3-week high, and
  • Thursday’s EIA monthly ethanol report for February, which is likely to show that the recent surge in production is leveling off as the industry hit a record 98.1% of its capacity in January.

The distillers’ dried grain (NYSEARCA:DDG) futures contract starts trading at the CME Group on Monday.  The new DDG futures contract means that ethanol producers will now have all the futures contracts they need to fully hedge their production process, both the inputs of corn and natural gas (which is typically used as fuel to produce the heat used by the ethanol plants) and the outputs of ethanol and DDG.  The DDG futures contract will also allow livestock and poultry producers to hedge their DDG feed costs. 

The futures contract marks the coming of age of DDG, which has burgeoned into a major global commodity market.  The U.S. corn-based ethanol industry uses about one-third of the U.S. corn crop to produce ethanol, but about 31% of that corn usage is returned back into the food chain through DDG.  DDG has also provided the U.S. with a major export market, with a record 5.64 million metric tons of DDG exports in 2009 worth nearly $1 billion, according to the Renewable Fuels Association.

May CBOT Ethanol futures prices last week rallied for a second week to post a new 5-week high and close slightly higher by 0.3 cents (+0.2%) at $1.585 per gallon.  Ethanol prices were supported by the 3.3% rally in gasoline prices and the likelihood that ethanol production is leveling off due to capacity limits.  The markets will be carefully watching Thursday’s monthly EIA report to gauge the extent of inventory buildups.  Assuming that inventories remain under control, ethanol prices may have some room to rally due to the cheap price relative to gasoline.  Bearish factors that kept a lid on ethanol prices last week included the 3.0% sell-off in corn prices and the 0.7% higher close in the dollar index.

Ethanol/Gasoline – May gasoline futures prices last Friday rallied to a new 3-week high and closed the week up 7.61 cents (+3.3%) at $2.3531 per gallon.  Bullish factors last Friday included the weaker dollar and last week’s oil rig explosion in the Gulf of Mexico, which may slow the “drill baby drill” contingent looking to significantly expand oil drilling off the U.S. coastlines.  Last week’s lagging ethanol prices allowed the spread of May ethanol prices minus gasoline prices last week to fall by 7.3 cents to -76.8 cents, which was a new 1-3/4 year low.

Ethanol/Corn – May corn futures prices last week fell by 11.0 cents (-3.0%) to close at $3.5300 per bushel.  Corn prices fell last week mainly due to the surge in corn planting to a record pace of 19% in the week ended April 18.  That was a dramatic rise from 3% in the previous week.  Monday’s weekly Crop Progress report is likely to show a continued surge in corn planting, which increases the chances that the yield this year could exceed last year’s record of 164.9 bushels per acre.  The May ethanol-corn crush margin last week rose by 4.2 cents to 32.4 cents per gallon, mildly above the recent 9-month low of 25.1 cents.

Ethanol Calendar

  • Apr 28:  Weekly DOE Gasoline Inventories
  • Apr 29: EIA Monthly Ethanol Report
  • May 11: USDA WASDE Crop Supply-Demand
  • Late Summer: EPA’s E15 decision due

Read the full PDF report with ethanol news digest and graphics at

Please see full PDF report for disclaimer and copyright information.

Disclosure: None