Corn prices shrugged off the worst US ethanol production
data on record amid ideas that the decline in output of the biofuel may have
reached a low, with prices also getting a boost from worsening South American
US ethanol output slumped by 22,000 barrels a day to 770,000
barrels a day last week, the lowest figure since the Energy Information Administration
began collecting data in 2010.
The decline follows a series of further capacity cuts by
ethanol producers, with Valero on Tuesday saying it had idled three of its 10 plants in the last quarter of 2012, while Abengoa Bioenergy and Poet have over
last week unveiled three temporary shutdowns between them.
On Tuesday, White Energy said that a Texas ethanol plant it
shut on January 7 because of poor margins, squeezed by high corn prices, will
remain closed until March, and potentially until the last quarter of 2013.
'Record period of
As a further sign of a slack ethanol market, US stocks of
the biofuel rose 2.3% last week to 20.54m barrels, taking gains in 2013 nearly
to 700,000 barrels.
However, the market's outlook may be less dismal than it
appears, with industry losses waning after what Linn Group analyst Jerrod Kitt
termed "the longest period of negative profitability in the history of the
Benson Quinn Commodities analyst Brian Henry said that while
ethanol maintained a large discount to gasoline, of more than $0.50 a gallon, "prices
have been rising, as have those of distillers' grains," an important byproduct
of corn ethanol manufacture used as animal feed.
These dynamics are "seeing production margins improve, which
should be expected as capacity is declining".
Paper vs physical
Mr Kitt said that ethanol plant profitability, as measured
in Nebraska, had improved from the equivalent of $0.50 losses per bushel of
corn close to breakeven, and producers "may be even a little bit profitable if
they sell at the right opportunity".
The geography of ethanol manufacture is important, with
plants close to main Corn Belt corn-growing states seen having an advantage in
buying cheap raw material compared with sites in states, such as Texas, with small
corn production, and competition with cattle ranchers for supplies of the
Furthermore, it was getting more expensive for blenders to
buy so-called Rins (renewable identification numbers), a paper proxy for
ethanol, to meet targets for ethanol use, compared with using the physical
Prices of Rins have soared to 33 cents a gallon, from 1 cent
a gallon in mid-June, as buying compliance with the US mandate has become more
attractive compared with physical blending.
"This has not yet fed through into the physical market, but
we believe it will," Mr Kitt said, terming Rins supplies "undeniably tight",
and comparing the cheapness of ethanol compared with gasoline to the high cost
"When we look back in a few months time, I think we will identify around now as having been the bottom for ethanol production."
Corn prices also received support on Wednesday from a further
deterioration in the South American weather outlook, where dryness in Argentina
and southern Brazil is sparking concerns.
"The weather leans positive, with a drier tone to Argentina
in the on-to-four day and 100-to-15 day forecasts prompting more analysts to
trim Argentina corn and soybean production forecasts," Richard Feltes at broker
RJ O'Brien said.
Lanworth on Wednesday reduced its estimate for Argentina
corn output by 400,000 tonnes to 25.6m tonnes, although it offset this
downgrade with a 300,000-tonne upgrade to 75.8m tonnes in its forecast for the
Chicago corn futures for March delivery closed 1.5% higher at $7.40 ¼ a bushel.