Corn price tumble sends Valero profits higher

Linn Group poured some cold water on data showing a buoyant ethanol production sector by saying that they could be faring even better, were it not for a slump in prices of distillers' grains, a major by product.

US ethanol production came in at 954,000 barrels a day, the fifth highest number on data going back four years, officials said on Wednesday.

The statistics came shortly after producer Valero Corporation reported a near-doubling year on year to $187m in operating profits from making the biofuel in the April-to-June quarter, attributing the increase to the slump in corn prices.

The raised profitability "was mainly due to higher gross margin per gallon driven by lower corn costs as a result of an abundant corn crop and lower industry ethanol inventories at the start," US-based Valero said.

"Our ethanol investments have continued to be strong performers," said Joe Gordero, the Valero chief executive.

Operating income per gallon of ethanol rose to $0.63, from $0.30 in the same quarter the previous year.

Inventories rise

However, quarter on quarter, the data showed a decline in performance, with Valero's operating income coming in at $243m for the first three months of 2014, equivalent to $0.87 per gallon.

And the weekly US ethanol data, in also showing a rise in stocks of 647,000 barrels to 18.59m barrels, were poorly received by markets, with Chicago's September contract losing small gains to stand 2.0% lower at $2.041 a gallon an hour after their release.

"The fact there was a build in stocks was a little negative," said Roy Huckabay executive vice president at broker Linn Group in Chicago.

Furthermore, while ethanol producers were indeed making strong margins on ethanol production - equivalent to some $2 per bushel of corn on the spot market, and $1 per bushel hedged for October-to-December - they could be making even more were it not for softness in prices of distillers' grains (DDGs) partly of their own making.

Prices of DDGs have tumbled some 40% over the last five months, hurt by a double whammy of weaker grain markets and growing Chinese limitations on imports of the product, used as a high-protein feed ingredient.

At around $200 a tonne, DDGs were mid-month trading with a premium of less than $5 a tonne to corn at US Gulf ports, down from more than $110 a tonne in late February, according to the US Grains Council.

However, domestic has also been undermined by a decision by ethanol producers to keep DDG prices higher than might appear warranted over the winter, Mr Huckabay said.

"A lot of livestock producers just took it out of their rations, replaced it with corn," he told

With decisions to change feed ingredients requiring some time to work through, DDG prices were now trading 20% below corn in Iowa and 25% below in Nebraska, compared with a typical discount of about 10%.

Rising volumes

Valero's group earnings for the quarter rose 26% to $588m, equivalent to $1.22 per share on an underlying basis, in line with market expectations.

Revenues rose 2.6% to $34.91bn.

On ethanol, the group forecast production volumes in the current quarter beating the 3.3m barrels in the April-to-June period, in part thanks to a plant acquisition.

"We expect volumes to increase with the startup of our recently acquired plant in Mount Vernon, Indiana," Valero investor relations director John Locke said.

"Given the favourable ethanol margin environment, we look forward to this plant's contributions."

Valero shares stood 4 cents lower at $49.89 in lunchtime deals in New York.

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