Worst drought in decades strikes ethanol industry

Chicago, 23 July 2012

CME Group Biweekly Ethanol Report: The worst drought in decades is striking a serious blow to ethanol industry -- Sep corn prices have now soared by 62% in the past 5 weeks from $5.095/bu on June 15 to $8.245/bu last Friday.  Yet Aug ethanol prices have been unable to keep pace, rallying by only 33.5% over the space of those 5 weeks.  Lagging ethanol prices have caused the ethanol-corn margin to plunge by about 24 cents per gallon over those 5 weeks to the current level of -28.7 cents per gallon.  Including DDGS, the margin is now only 9.4 cents.

Many ethanol producers are now running at a loss and some are shutting down production.  Ethanol production has plunged by a total of 12.8% in the past 5 weeks to a 2-1/2 year low of 802,000 barrels/day.  Inventories have also fallen in recent weeks and hit a 6-month low of 19.532 million barrels in the first week of June.  However, ethanol inventories are still 2.1% higher on the year and are far from tight.

The USDA in its July 11 WASDE report slashed its 2012/13 corn yield estimate to 146.0 bushels per acre from June's estimate of 166.0 bushels and cut its ending stocks estimate to 1.183 billion bushels from 1.881 billion bushels.  That caused the stocks-to-use ratio to fall to 9.3% from 13.7% in June, which was still higher than this year's (2011/12) very tight 7.2%. However, the USDA in its next WASDE report on August 10 will have to make even deeper cuts given the unrelenting heat and drought in recent weeks.

Due to the drought and the high cost of corn, the meat and poultry industries are already pushing the EPA to issue a waiver for the RFS ethanol mandate.  A waiver would mean less ethanol usage, less corn usage, and presumably lower corn and feed prices for livestock and poultry producers.  However, the situation does not yet appear to rise to the waiver requirement for "severe harm" to the economy of a state, region or the country.

Ethanol Market Action -- Aug ethanol futures prices have rallied sharply in the past four weeks and posted a new 8-month high, closing the week +14.9 cents (+5.8%) at $2.705.  Ethanol prices have followed corn prices sharply higher and also benefited from last week's 4.5% gasoline rally.  The sharp 12.8% decline in ethanol production in the last five reporting weeks has also been a supportive factor for ethanol prices.

Ethanol/Gasoline -- Aug gasoline futures have rallied sharply in the past four weeks and posted a new 2-month high, closing last week +12.69 cents (4.5%) at $2.9430 per gallon.  Bullish factors include (1) the prospects for tightening world oil markets with the much tighter sanctions that have now gone into effect on Iran, (2) the lack of any progress on the nuclear talks with Iran and concern that Iran may start striking out at oil targets in the Persian Gulf, and (3) the 4-week decline in U.S. oil inventories due to high U.S. refinery operation.  Aug ethanol prices last week closed at a much smaller 23.8 cent per gallon discount to gasoline prices.

Ethanol/Corn -- Sep corn futures prices last week closed sharply higher by +84.00 cents (+11.3%)  at $8.245 per bushel and posted a new record high.  In the space of just six weeks, the good-to-excellent condition of the U.S. corn crop plunged by 41 percentage points to 31% in the week ended July 13 from 72% in the week ended June 1.  The Sep ethanol-corn crush margin last week fell by 15.9 cents to -28.7 cents/gallon.  Including DDGS, the Sep corn for ethanol crush margin fell by 15.9 cents to 9.4 cents/gallon.

Ethanol Calendar
July 25: EIA Weekly Petroleum Status Report
July 30: EIA Petroleum Supply Monthly
Aug 1: EIA Weekly Petroleum Status Report
Aug 6: Next CME Ethanol Outlook Report
Aug 10: USDA WASDE Crop Supply-Demand

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