Linked In
News In
Linked In

You are viewing 1 of your 2 complimentary articles.

Register now to receive full access.

Already registered?

Login | Join us now

Ethanol producers are making trouble for themselves

Twitter Linkedin

America's ethanol producers should enjoy the good times while they last.

They are in clover at the moment, processing corn into record quantities of the stuff.

And potentially at healthy margins too. Ethanol plants appear, cannily, to have bought their corn supplies in advance last year, before prices really took off, the US Department of Agriculture said on Wednesday, explaining the gap between growers' receipts from the grain and the "substantially higher" cash market bids.

However, there are good reasons to think that times for the industry might be about to get tougher.

Role reversal

Some are financial. One reason America's corn ethanol producers are enjoying a boom is that, unusually, they are more competitive than Brazilian rivals which make the biofuel from sugar.

If corn prices look steep, at their highest in more than two years, remember raw sugar is near a 30-year high.

However, that dynamic, which has allowed America's corn ethanol producers to usurp Brazilian peers on export markets, may reverse.

Indeed, futures markets indicate pricing power returning to sugar ethanol mills, which can buy their raw material for March next year 22% cheaper than they can get it for delivery next month.

That's more than twice the discount that corn ethanol plants can count on, to judge by Chicago prices.

Tax factor

But other hurdles will require more than canny hedging.

The industry's favourable finances are supported by tax perks - a blender's tax credit, besides the market protection offered by levies slapped on ethanol imports.

However, the clock is ticking for these benefits. They are due to run out at the end of this year, when reinstating them may not be so easy as it was last time they lapsed, in December.

Even in the few weeks since, food prices have risen up the world agenda, questioning the morality of tying up so much productive farmland for an industrial purpose.

Latest official estimates forecast 40% of the US corn crop going to make ethanol, up from 35% last year, and equivalent to the fruits of 35m acres of land.

That's a large target for the food lobby to aim at should concerns about supplies become an even bigger deal.

Achilles heel

Ethanol producers can at least count on a silver lining from the turn towards civil upset in Middle East and North Africa.

The threat the unrest poses to some major oil exporters exposes America's vulnerability on energy - its reliance on imports for roughly half the 19m barrels or so of oil it uses a day.

The food concerns of importing states may appear a luxury if domestic fuel security is at stake.

Ironically, the discontent sparked by food price gains could provide a shield for an industry which helped cause them.

By Mike Verdin

Twitter Linkedin
Related Stories

Morning markets: Hard wheat regains premium over soft, amid US dryness worries

Kansas City wheat outperforms, as Plains precipitation worries extend to a dearth of snow cover. But Kuala Lumpur palm oil hits a 16-month low

Evening markets: Ags gain, as funds begin to get that year-end festive mood

Ag prices recover, helped by the likes of more positive comment on US export competitiveness, and some more negative talk on Argentine rains

Morning markets: Grains stage a recovery. Will it last?

Corn, soybean and wheat futures start Wednesday making headway which has been difficult to come by of late. Cotton gains too

Evening markets: ags overlook crumbs of comfort in Wasde to set fresh historic low

The Bcom ag commodity subindex ends at a fresh record low, as US export fears overtake upbeat interpretations of corn, cotton estimate revisions
Home | About | RSS | Commodities | Companies | Markets | Legal disclaimer | Privacy policy | Contact

Our Brands: Comtell | Feedinfo | FGInsight

© 2017 and Agrimoney are trademarks of Agrimoney Ltd
Agrimoney is part of the Briefing Media group
Agrimoney Ltd is registered in England & Wales. Registered number: 09239069