Chicago, April 2010: CME Group Ethanol Outlook Report - April 12, 2010

US ethanol production in January hit a new record high of 1.065 billion gallons, up 3.9% m/m and 30% y/y, according to last week's monthly EIA report.

However, the market showed only a mildly bearish reaction to the report since (1) demand also hit a record high, (2) inventories remained under control, and (3) the industry utilization rate rose to a record 98.1% of capacity, which means production cannot rise much farther over the near-term.  The Renewable Fuels Association pegged demand in January at 1.021 billion gallons (+4.6% m/m and +21.9% y/y), which implied a modest surplus of 44 million gallons or 4.2% of production.  The fact that ethanol is $1.20 cheaper than gasoline (including the 45-cent excise tax credit) means the market is absorbing most of the record level of production.

Ethanol inventories in January rose but remained generally under control, thus limiting the bearish impact of the EIA report.  Ethanol inventories on an absolute basis rose to a record high of 748 million gallons, but that was only 70.2% of production, lower than the 5-year seasonal average of 73.1%.  In terms of inventory days, the RFA reported that inventories were at 22.7 days of usage, which was up from 22.3 days in December but slightly below the 4-year seasonal average of 23.0 days.

May CBOT Ethanol futures prices last week fell to a new 8-month low and closed the week down 2.3 cents (-1.5%) at $1.537 per gallon.  Bearish factors included the 1.5% sell-off in gasoline and the EIA's report that U.S. ethanol production in January hit a new record high.  The decline in ethanol prices was limited by the fact that January inventories remained generally under control and that corn prices rose slightly  by 0.4%.

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