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Conditions finally appeared to be improving for the U.S. ethanol sector this February after an extended period of poor margins and weak demand. Several positive headlines in the first half of the month had caused investor sentiment to improve, prompting a rally among the sector's stronger names, Green Plains, Inc. (GPRE) and REX American Resources (REX) (see figure). Even Pacific Ethanol (PEIX) showed signs of life despite having seen its market cap cut in half over the preceding year. Only The Andersons (ANDE) continued to struggle, reflecting the perfect storm of low feedstock and fuel prices that has impacted its diversified operations for the last year.
Two major developments encouraged the ethanol sector's beaten-down investors. First, a U.S. appellate court ruled that the U.S. Environmental Protection Agency [EPA] had violated federal law in its expanded allocation of small refinery exemptions [SRE], also known as "hardship waivers", to the refining sector under the U.S. revised Renewable Fuel Standard [RFS2]. The EPA had greatly expanded its allocation of SREs under the Trump administration and weakened regulatory demand for biofuels such as corn ethanol in the process. The court's decision gave rise to the hope that the EPA would respond by limiting its SRE allocations moving forward, which would potentially shore up support for ethanol producers in the process. This hope became reality last week after Bloomberg reported that the EPA intended to scale the allocations back in future years in response to the court decision.
Second, U.S. ethanol exports jumped in December after having trended much lower on a YoY basis through the first 11 months of 2019. While December's 61% QoQ growth was unable
