Ethanol’s best annual price performance since 2006 is coming apart as the lowest seasonal gasoline demand in 10 years reduces consumption at the same time a rebound in the corn crop helps boost supply.
The biofuel has dropped 10 percent from an 18-month high of $2.744 a gallon on May 31 on speculation that lower manufacturing costs will lift production. Use of gasoline, with which ethanol is blended, is down 5.3 percent from a year earlier, according to data from the federal Energy Information Administration.
Last year, drought boosted corn prices to record levels, idling as many as 20 ethanol plants because it was no longer profitable to make the fuel. Now the returns are the best since December 2011, prompting distillers to increase output at the start of the U.S. summer driving season when demand typically peaks. Imports, attracted by the higher prices, have almost tripled from a year earlier.
“It’s not pretty, that’s for sure,” Justin Dirico, manager of the biofuels desk at Eagle Energy Brokers LLC in New York, said Wednesday. “It’s catching a lot of people off guard. The U.S. economy is doing good, but oil demand and gasoline demand just hasn’t been there in 2013.”
Ethanol’s 25 percent advance on the Chicago Board of Trade in the first five months of the year was the best for the period in seven years and topped the 19 percent gain of natural gas, which was then the top performer in the Standard & Poor’s GSCI Spot Index of 24 raw materials. The fuel reached the highest level since November 2011.
Last year’s drought drove corn futures to a record $8.49 per bushel on Aug. 10. As production slid and farmers planted a record crop to rebound from the drought, the price of corn, the main ethanol feedstock in the United States, fell to $6.40 on May 21.
The corn crush spread - the cost difference between a gallon of ethanol and corn to make it - was 16 cents a gallon as of May 31, compared with a minus 35 cents on Dec. 31, data compiled by Bloomberg show.
One bushel of corn makes at least 2.75 gallons of the renewable fuel. Ethanol is blended with gasoline as part of a 2007 U.S. energy law known as the Renewable Fuels Standard, which calls for refiners to use 13.8 billion gallons of the fuel this year and 14.4 billion in 2014. Ethanol is typically sold in a combination known as E-10, with 10 percent of the mix made up of the biofuel and the rest gasoline.
Denatured ethanol for July delivery rose 3 cents, or 1.2 percent, to $2.461 a gallon on the Chicago Board of Trade, leaving prices up 12 percent for the year, for now the best since a 17 percent gain in 2011. The crush spread was 12 cents a gallon.
Production in the week ending June 7 was 884,000 barrels a day, up 15 percent from the record-low 770,000 barrels a day in January, a report from the Energy Information Administration, the statistical arm of the U.S. Energy Department’s, showed Wednesday.
The U.S. is projected to have a record corn harvest of 14 billion bushels in 2013, up from 10.8 billion in 2012, the U.S. Department of Agriculture said in a report Wednesday.
If realized, the department’s corn estimate probably will translate into higher ethanol production, Jim Damask, a trader at StarFuels Inc., in Jupiter, Fla., said last week in a phone interview.
“Now we have more corn than we know what to do with, and that eliminates a lot of fears for these ethanol buyers,” Damask said.
Southwest Georgia Ethanol LLC said on June 10 that it restarted production at its distillery in Camilla, Ga., because of cheaper manufacturing costs.
Poet LLC, the second-biggest U.S. ethanol producer, said in April that it resumed operations at its plant in Macon, Mo., and Valero Energy Corp., the third-biggest maker of the fuel, restarted output at its distillery in Linden, Ind., in March.
East-Kansas Agri-Energy LLC is considering reopening its plant in Garnett, Kan., after the harvest in September, Doug Sommer, the mill’s manager said Wednesday.
Gasoline demand in the week ending June 7 averaged 8.65 million barrels a day, down from 9.13 million a year earlier and the lowest for this time of the year since 2003, Energy Information Administration data showed.
With the attraction of higher prices through May, imports have averaged 17,000 barrels a day so far this year, up from 6,000 a year earlier.
The prospect of increased imports from Brazil has also weighed on ethanol prices, said Dirico. Anhydrous ethanol in Sao Paulo cost $2.33 a gallon in the week ending June 7, according to data compiled by Bloomberg.
“If we keep on getting a lot of imports and blending doesn’t pick up, this could be an ugly story,” Dirico said.
Business, Pages 71 on 06/16/2013