“Demand for gas went off a cliff in early September, and ethanol blending fell off with it,” said Geoff Cooper, senior vice president at the Renewable Fuels Association, a trade group for ethanol makers.
Ethanol futures plunged 28% last month, as falling domestic demand left U.S. producers with the largest inventories in more than a year.
September saw a near free-fall in ethanol futures as prices declined 62 cents per gallon and additional price pressure is likely still to come. Front month October ethanol futures fell from $2.20 per gallon at the end of August (before Labor Day weekend) to $1.58 in late September.
The price drop marks a blow to ethanol makers, but the industry is accustomed to volatility and has faced more severe setbacks. In 2012, many producers had sharp losses and some idled plants as the price of their main raw material, corn, soared to records due to a severe U.S. drought. In 2008, some ethanol companies filed for bankruptcy amid a similar spike in corn prices.
The market is focused on many factors, including falling corn prices before an expected record harvest, growing ethanol inventory levels and eroding demand. Demand softness is not unexpected at this time of year with driving declining seasonally. Lower prices are expected to help export demand long term but exports are a small piece of the ethanol price pie.
The drop in ethanol prices comes as the $44 billion ethanol industry is grappling with other challenges. The Environmental Protection Agency is weighing a final decision on its proposal last year to cut its annual requirement for ethanol blending in gasoline, due in part to weak demand for blends containing more than 10% ethanol. The EPA may make a final decision within the next couple of weeks, according to a person familiar with the deliberations. The EPA had proposed a requirement that 13 billion gallons of corn ethanol be blended into the nation’s fuel mix in 2014, lower than the 14.4 billion originally intended under a 2007 law.
On Thursday, ethanol futures for October delivery, the front-month contract, fell 0.3% to $1.528 a gallon on the Chicago Board of Trade, the lowest closing price for a front-month contract since June 2010.