Fresh Rally in Corn Prices to 2-Year High

by: Biofuels

Fresh rally in corn prices to 2-year high further boosts profit risks for ethanol producers -- Ethanol prices in the past three months have now rallied by a total of 50%, just slightly below the overall 54% rally in corn prices. The ability of ethanol prices to keep pace with the corn rally has preserved most of the profit margin for corn-based ethanol producers. This contrasts with the situation in late-2007 and early-2008 when ethanol prices could not keep pace with the corn rally and there were widespread bankruptcies in the ethanol industry. While ethanol prices have so far kept up with corn prices, the current situation is still risky for ethanol producers given the possibility that ethanol prices could decouple from corn prices and hurt ethanol producer profit margins.

Ethanol inventories continue to decline -- Last Wednesday’s weekly EIA report showed that US ethanol inventories fell by another 1.5% to a 10-month low of 16.898 million barrels. Inventories have steadily declined in the past three months and are down by 15.2% from the July 2 record high of 19.921 million barrels. US ethanol production rose by 4.6% in the latest week to 863,000 bpd, which was just 1.4% below the record high of 875,000 bpd posted in early September. However, strong demand for ethanol is more than absorbing the near-record production level and inventories are still falling, a bullish sign for ethanol prices.

Ethanol Market Action -- November CBOT Ethanol futures prices last Friday soared by 19.6 cents (+9.9%) to a new 2-year high and finished the week up 34.2 cents at $2.184 per gallon. Ethanol prices last week rallied on the 13.4% rally in corn prices, the 3.1% rally in gasoline prices, and the bullish weekly EIA ethanol inventory report, which indicated continued strong demand for ethanol despite the recent strength of ethanol prices relative to gasoline prices.

Ethanol/Gasoline -- November gasoline futures prices last week extended the previous week’s 7.5% rally to post a new 5-month high and close 6.51 cents higher (+3.1%) at $2.1512 per gallon. Gasoline prices were boosted by the weak dollar and by last week’s 1.6% rally in the S&P 500 to a new 5-month high, which highlighted the general optimism about the medium-term economic outlook. Ethanol prices last week soared by 18.6% versus the 3.1% rally in gasoline prices, meaning ethanol again became more expensive than gasoline last week by 3.3 cents, although ethanol is still cheaper by 42 cents including the 45-cent ethanol tax credit.

Ethanol/Corn -- December corn futures prices last Friday closed limit-up by 30 cents at a new 2-year high due to the USDA report, prompting a close for the week of up 62.5 cents (+13.4%) at $5.2825 per bushel. Corn prices have now rallied by a total of 54% in the space of just three months because of very strong demand and a smaller-than-expected crop for this summer. The USDA last Friday surprised the market with a 3.8% cut in the size of the corn crop, producing a 19% cut in the ending-stocks estimate to 902 million bushels. The stocks/use ratio fell to 6.7% from 8.3%, a 14-year low and the tightest level since 1996/97. The Dec ethanol-corn crush margin rose by 6.5 cents to 22.3 cents/gallon. Including DDG, the Sep corn for ethanol crush margin rose by 6.5 cents to 58.5 cents/gallon.

Ethanol Calendar

October 14: EIA Weekly Petroleum Status Report
Mid-October: EPA’s E15 decision expected for 2007+ model vehicles (early-December decision expected for 2001-06 models)
October 28: EIA July Monthly Ethanol Report
November 9: USDA WASDE Crop Supply-Demand

Disclosure: No positions