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USDA report suggests adequate corn supply and continued profitability for U.S. corn-based ethanol producers

|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,
- gasoline prices, which remain on the defensive after last Friday’s sharp sell-off, and
- the ethanol supply/demand situation where demand for ethanol should remain relatively strong with ethanol prices being 96.2 cents per gallon cheaper than gasoline prices including the 45-cent tax credit.

Last week’s USDA World Agricultural Supply and Demand Estimates (WASDE) report was mildly bullish for corn prices since the USDA cut its old-crop 2009/10 U.S. carry-over figure by 8% to 1.748 billion bushels from 1.899 billion bushels.  However, the USDA raised its new-crop 2010/11 U.S. carry-over figure by 9.6% to 1.818 billion bushels from 1.659 billion bushels.  The bottom line for the ethanol market is that there should still be plenty of corn to process into ethanol, thus keeping a lid on corn prices and supporting ethanol-producer profitability. 

The USDA if anything is likely to revise its U.S. crop production figures higher in coming months as the early start to the growing season likely produces a record yield and record-sized corn crop.  The USDA’s current estimates already imply a stocks/use ratio of 13.7%, which would be the second highest ratio in the past 5 years and indicate adequate domestic corn supplies.  Moreover, the global corn supply situation is even more favorable with the USDA forecasting a record global carry-over of 827.9 million metric tons and a 18.6% stocks/use ratio, the second highest in 6 years.  Two bullish wild cards for corn prices, however, are Chinese import buying and the fading El Niño effect in the Pacific, which could produce drier weather later this summer.

June CBOT Ethanol futures prices last week drifted higher early in the week and posted a new 2½-month high but then fell sharply on Friday to close slightly lower by -0.8 cents (0.5%) at $1.619 per gallon.  Ethanol prices were pressured last Friday along with the entire commodity sector by the sharp rally in the dollar index to a new 13-month high and by concerns that the European debt crisis will depress global economic growth and fuel demand.

Ethanol/Gasoline – June gasoline futures prices last Friday fell sharply to reverse early-week gains and close the week just slightly higher by 0.57 cent (+0.3%) at $2.1308 per gallons.  Gasoline prices saw some technical short-covering early in the week to retrace some of the recent 30-cent plunge.  However, gasoline prices then faded on Friday as commodity prices took a heavy hit across the board.   The spread of June ethanol prices minus gasoline prices last week fell slightly by 1.4 cents to -51.2 cents, which was well above the recent 1-3/4 year low of -77.0 cents.

Ethanol/Corn – July corn futures prices last Tuesday posted a new 2-month high but then fell sharply on Thursday and Friday to close the week down 9.0 cents (-2.4%) at $3.6300 per bushel.  Bearish factors last week included the sharp rally in the dollar and the fast-start to the corn growing season with 39% of the crop having already emerged (versus the 5-year average of 21%).  The July ethanol-corn crush margin last week rose by 1.7 cents to 33.3 cents per gallon, mildly above the recent 10-month low of 25.1 cents.  Including DDG, the corn for ethanol crush margin closed up 2.3 cents at 64.5 cents per gallon.

Ethanol Calendar
- May 19:  Weekly DOE Gasoline Inventories
- May 27: EIA Monthly Ethanol Report
- June 10: USDA WASDE Crop Supply-Demand
- Summer: EPA’s E15 decision due

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