Last week, Ethanol declined to a six-week low after a government report showed production of the biofuel rose to a record. Ethanol futures for August tumbled 3.7% to $1.991 a gallon in Chicago. Corn futures for July, meanwhile, stood 1.0% higher at $4.43 a bushel, with the data adding to some other arguments that price falls may have been overdone for now.
Ethanol futures fell after the Energy Information Administration said US biofuel plants production rose 3 percent to 972,000 barrels a day last week, up 28,000 barrels a day on the previous week, and the highest figure since records began four years ago.
Some increase had been expected, given the weak markets in corn – the main raw material for US ethanol producer – and strength in gasoline prices, up more than 6% in the past two weeks, buoyed by the latest round of Middle East unrest which has underpinned energy market overall. However, the extent of the increase took many investors by surprise.
In its June 11 article “Why Are Ethanol Prices and Production Profits So High?“, farmdoc daily concluded that the recent shift in the U.S. net ethanol trade balance, particularly since October 2013, has contributed to the continuation of high ethanol prices relative to corn prices and the resulting historically large margins for ethanol producers. In a follow-up article on June 18, “Shifting Trade Patterns and Higher Crude Oil Prices Brighten Prospects for U.S. Ethanol and Corn“, Darrel Good and Scott Irwin from the University of Illinois examine some of the details of the shifting trade pattern and discuss the potential implication of this shift along with the recent increase in crude oil prices for the prospects of U.S. ethanol production and corn consumption.
Corn prices that have dropped 34 percent in the past year have helped reduce production costs for ethanol makers and allowed them to boost operations. One bushel of the grain makes at least 2.75 gallons of the renewable fuel.
“People are looking to place gallons and get rid of supply that they may have laying around,” Mark Ruyack, a manager at StarFuels Inc., a Jupiter, Florida-based broker, said today in a telephone interview.
Denatured ethanol for July delivery slumped 8.5 cents, or 4 percent, to settle at $2.057 a gallon on the Chicago Board of Trade, the lowest level since May 6. Prices have increased 7.6 percent this year.
Margins for ethanol producers have fallen to about $0.50 a gallon, from $0.73 a gallon two weeks ago, according to Allendale, the Chicago broker.
Margins peaked at $1.55 a gallon in late March, when they gained an extra fillip from poor weather which hampered transport of the biofuel, forcing buyers to pay up for available supplies.
At Iowa-based US Commodities, Don Roose said that “thanks to the China issue, we do have pressure on prices of distillers’ grains“, or DDGs, a byproduct of ethanol production used as a high protein, livestock feed ingredient.
China has suspended imports of US DDGs amid concerns about contamination with MIR 162, a Syngenta corn variety cleared in Washington but not in Beijing.
“But on the other side, the market for corn has been so low, supporting margins.”
Monthly U.S. trade data will be monitored closely to see if the favorable trade balance will continue. “The recent run-up in crude oil and wholesale gasoline prices and the decline in wholesale ethanol prices have made ethanol attractively priced as an octane enhancer and as a substitute for other gasoline feedstocks. A continuation of that favorable price relationship would be expected to increase both world consumption of ethanol and exports of U.S. ethanol,” the analysis says.