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U.S. ethanol production hits new record high but inventories remain under control; CRB/CME Weekly Ethanol Report

|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:
- the corn market ahead of Tuesday’s USDA weekly Crop Progress report, which will now be watched mainly for crop quality since most of the corn crop has been planted,
- gasoline prices, which stabilized last week after having plunged by 22.5% in the previous 3 weeks, and
- the ethanol supply/demand situation where last week’s March EIA report indicated that strong demand is so far absorbing record ethanol production levels.

U.S. ethanol production hits new record high but inventories remain under control -- Last Thursday’s monthly EIA report indicated that U.S. ethanol production in March reached a new record high of 1.103 billion gallons (+32.4% y/y).  Despite that record high, inventories remained under control at 827 million gallons, which was also a record high but was not out of line given the higher pipeline of ethanol production and usage.  As a percentage of production, inventories were at 75.0%, which was below last year’s March level of 78.9% and the 5-year March average of 79.3%.  Strong demand has so far absorbed the record level of production and kept inventories down.

The U.S. ethanol industry in the past 13 months has boosted production sharply by 45% in response to profitable economics.  However, the industry risks creating a serious oversupply situation that would cause a sharp drop in ethanol prices.  The industry badly needs the EPA this summer to approve a boost in the blend wall to at least E12 to keep demand strong.  On the brighter side, the industry is currently operating at 96.1% of capacity, which suggests the industry cannot boost production much farther without building more plants, which takes time and gives the industry a brief window of opportunity to build demand.
July CBOT Ethanol futures prices moved sideways last week and closed slightly lower by 0.9 cents (-0.6%) at $1.594 per gallon.  Ethanol prices were pressured by the 2.7% sell-off in corn prices and by last Thursday’s report of a new record high in U.S. ethanol production in March.  The main supportive factor for ethanol prices was last week’s 3.8% recovery rally in gasoline prices.

Ethanol/Gasoline – July gasoline futures prices last Tuesday posted a new 8-month low but then recovered during the week to close 7.38 cents higher (+3.8%) at $2.0266 per gallon.  Gasoline prices recovered last week along with the stock market on technical short-covering and reduced worries about the European debt crisis. The spread of July ethanol prices minus gasoline prices last week fell by 8.3 cents to -43.3 cents, which was well above the recent 1-3/4 year low of -77.0 cents.

Ethanol/Corn – July corn futures prices fell sharply last Friday to close the week down 10.00 cents (-2.7%) at $3.5900 per bushel.  Friday’s sell-off was due to a favorable weather combined with renewed weakness in stocks and commodities on European concerns.  Last Monday’s Crop Progress report showed that the U.S. corn crop remains in good shape with 71% of the crop having emerged as of May 23 (versus the 5-year average of 62%) and with 71% of the crop in good-to-excellent shape (versus 67% in the previous week).  The July ethanol-corn crush margin last week rose by 2.7 cents to 31.2 cents per gallon, mildly above the recent 1-year low of 25.1 cents.  Including DDG, the corn for ethanol crush margin closed up 2.7 cents at 62.7 cents per gallon.

Ethanol Calendar
- June 2:  Weekly DOE Gasoline Inventories
- June 10: USDA WASDE Crop Supply-Demand
- June 29: EIA Monthly Ethanol Report
- Summer: EPA’s E15 decision due

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