Thursday, August 5, 2010

Wheat Rally to Affect Ethanol Price

The big news in the grains markets has been the big shortfall in wheat production from Russia and the Ukraine.  The extent of the heat damage to the crop is not clear but there are strong rumors in the market that Russia is going to ban exports.  How does this impact ethanol?

Corn prices in the US are being pulled by the wheat markets.  The wheat futures are up 60 cents/bushel in early trading today in response to developments in Europe.  Corn has pushed into $4.10/bushel range for the September contract in response to the wheat move.  The ethanol/corn crush margins are falling back into the 27-29 cpg range from 32 cpg earlier this week.

In Europe, approximately one third of the fuel ethanol production is wheat based.  The incremental gallon in Europe is produced from wheat.  This is going to drive prices in Europe which will translate into continued demand for US ethanol to fill Europe's ethanol requirements. 

Ethanol prices will need to move up in the US to keep pace with corn prices and the tug of exports to Europe.

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