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E15 debate heats up as EPA gets closer to making a decision

|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 Monday’s USDA weekly Crop Progress report and Tuesday’s USDA Crop Production report, where the market consensus is that the U.S. 2010-11 corn carry-over will be 1.884 billion bushels, 0.8% below the 2009-10 figure of 1.899 billion bushels,
- gasoline prices, which are on the defensive after last week’s sharp 11% sell-off, and
- the ethanol supply/demand situation where demand for ethanol may lighten up after last week’s sharp sell-off in gasoline prices reduced the price advantage of ethanol.

Debate heats up on E15 - The debate is heating up as the E.P.A. gets closer to announcing its decision about allowing E15.  The E.P.A. said last November that it planned to release its decision by “mid-year.”  U.S. automakers last week released a report saying that their testing showed problems with E15 is most of the engines they tested (see news digest).  However, the ethanol industry responded by noting that only a handful of engines were tested and that testing was not complete in any case.  Archer Daniels Midland CEO Patricia Woertz last week called for the E.P.A. to allow E11 or E12 for all engines, rather than a bifurcated move to allow E15 only for vehicles manufactured after 2001, which would be difficult to implement.  Even an E11 or E12 decision would be very favorable for ethanol prices since each percentage point represents about 1.3 billion gallons of additional demand for ethanol.

June CBOT Ethanol futures prices last week traded sideways below the recent 7-week high and closed the week slightly lower by 0.002 cents (-0.1%) at $1.627 per gallon.  Ethanol prices made an impressive stand by closing virtually unchanged on the week despite the sharp 11.4% sell-off in gasoline prices, the 0.9% sell-off in corn prices, and the economic and market turmoil caused by the Greek debt crisis and the plunge in the stock market.  Ethanol has seen strong demand recently, but that demand may ease a bit after last week’s sharp sell-off in gasoline prices reduced the price discount of ethanol versus gasoline to 49.8 cents from 77.0 cents.

Ethanol/Gasoline – June gasoline futures prices last week fell sharply to post a 3-month low and close down 27.43 cents (-11.4%) at $2.1251 per gallon.  Gasoline prices fell sharply due to the liquidation of commodities in general with the Greek debt crisis and Thursday’s sharp sell-off in the stock market, which produced weaker expectations for economic growth and fuel demand.  Gasoline prices were also pressured by the sharp 3.2% rally in the dollar index.  The spread of June ethanol prices minus gasoline prices last week rose sharply by 27.2 cents to -49.8 cents, which was well above the recent 1-3/4 year low of -77.0 cents.

Ethanol/Corn – July corn futures prices last week posted a new 7-week high on Thursday but then faded on Friday to close the week down 3.25 cents (-0.9%) at $3.72 per bushel.  Corn continues to see support from strong demand in general and particularly from China.  Last Monday’s weekly USDA Crop Progress report showed that 68% of the corn crop had been planted as of May 2, which is far ahead of the 5-year average of 40%.  The July ethanol-corn crush margin last week rose by 1.3 cents to 31.5 cents per gallon, mildly above the recent 9-month low of 25.1 cents.  Including DDG, the corn for ethanol crush margin closed up 1.4 cents at 62.2 cents per gallon.

Ethanol Calendar
- May 11: USDA WASDE Crop Supply-Demand
- May 12:  Weekly DOE Gasoline Inventories
- May 27: EIA Monthly Ethanol Report
- Summer: EPA’s E15 decision due

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