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Corn prices shrug off dire US ethanol data
By Agrimoney.com - Published 30/01/2013

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 weather.

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 losses'

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 ethanol industry".

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 grain.

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 biofuel itself.

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 of Rins.

"When we look back in a few months time, I think we will identify around now as having been the bottom for ethanol production."

'Weather leans positive'

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 Brazilian crop.

Chicago corn futures for March delivery closed 1.5% higher at \$7.40 a bushel.

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