Recently, the price of unleaded 87 gasoline in the USGC and NYH has fallen below the price of ethanol in those markets. The 45 cpg ethanol tax credit (VEETC) and RFS2 mandate have now become the driving force for blending ethanol into gasoline. The VEETC will become the primary economic driver for blending ethanol into gasoline as the ethanol/gasoline differential becomes negative. Ethanol blending is exceeding RFS2 mandates of the obligated parties, as evidenced by very low RIN prices in the 1.0-1.25 cpg range.
Corn, at $4 per bushel with a 30 cpg crush margin, yields an ethanol price at $1.75 per gallon FOB Chicago and 180-185 cpg ($75-$78 per barrel) in the major market areas.
Crude is now in the $75 per barrel range, and gasoline cracks of $8-$10 per barrel are falling, having lowered by almost $4 per barrel to $79 per barrel last week, and continues to go lower.
Corn prices are being driven by issues in the wheat market due to the projected wheat shortfall in Europe and Russia. China continues to be a large importer of numerous agricultural products, thereby supporting agricultural prices. Corn prices appear to have solid fundamentals that endure into 2011.
The economic drivers in the corn market (feedstock costs) do not appear to have a relationship with the price of ethanol as a transportation fuel. The economic drivers for inputs and outputs for an ethanol plant are disconnected and headed for a possible collision.
If you take away the VEETC by not renewing it for next year, and with crude/gasoline prices deteriorating to $70 per barrel or less, the ethanol producer is going to be put into a margin squeeze. With no VEETC to incentivize blending and lower crude/gasoline values, ethanol demand will drop sharply as non-obligated parties discontinue discretionary blending, and obligated parties minimize blending to their specific RFS2-mandated volume. The market will eventually correct itself in one of two ways: either a significant number of ethanol plants will shut down to affect corn’s supply/demand balance and drive the price of corn down, allowing ethanol production at a lower price, or, there will be a shortage of RINs, driving their price up to motivate obligated parties to pay an ethanol premium to gasoline. RIN prices will move up accordingly, providing an incentive to blend ethanol to the obligated parties, even though the actual physical price is uneconomic.
In summary, there is a danger of a severe margin squeeze in 2011 if the VEETC is not renewed and the corn-to-crude relationship shrinks further below today’s price relationship. This margin squeeze will result in plant capacity shutdowns to cope with the negative market signals.
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Tuesday, August 17, 2010
Wednesday, August 11, 2010
Ethanol Market Commentary - August 11th
The agriculture markets have calmed down from last week's volatility caused by the Russian ban on wheat exports.
Corn futures in the US remain in the $4/bushel range for front month futures.
The EIA stats this week for ethanol are neutral. Production remained essentially unchanged. Inventories fell another 200,000 bbls but remain 1,000,000 bbls higher than the first week of June.
Gasoline production continues to decline dropping 350,000 bpd over the last two weeks. Gasoline blended with ethanol declined slightly. The ethanol blending penetration was 84.5%.
Wheat prices in Europe have backed off the peaks reached last week.
The USDA WASDE report is due on Thursday - this has the potential to stir up agriculture price volatility.
European T1 prices have paused for the moment as shipments from the US begin to appear in the market. The arbitrage from the US to Europe has tightened. T2 prices have caught up with the big rise in T1 prices but there is noise in the market about the high cost of wheat pushing T2 prices further.
Brazil prices remain steady.
Corn futures in the US remain in the $4/bushel range for front month futures.
The EIA stats this week for ethanol are neutral. Production remained essentially unchanged. Inventories fell another 200,000 bbls but remain 1,000,000 bbls higher than the first week of June.
Gasoline production continues to decline dropping 350,000 bpd over the last two weeks. Gasoline blended with ethanol declined slightly. The ethanol blending penetration was 84.5%.
Wheat prices in Europe have backed off the peaks reached last week.
The USDA WASDE report is due on Thursday - this has the potential to stir up agriculture price volatility.
European T1 prices have paused for the moment as shipments from the US begin to appear in the market. The arbitrage from the US to Europe has tightened. T2 prices have caught up with the big rise in T1 prices but there is noise in the market about the high cost of wheat pushing T2 prices further.
Brazil prices remain steady.
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.
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.
Wednesday, August 4, 2010
EIA Ethanol Data - August 4th
The cut in ethanol production did not last long with production rebounding from its recent low of 816,000 bpd to 876,000 bpd, a 6.5% increase in one week. Total ethanol stocks stayed essentially flat. PADD II, which covers the Midwest producing area, showed a small increase of 50,000 barrels. The PADD I, which covers the USEC, showed a drop from 8,445,000 to 8,271,000 barrels. The drop on the USEC is supportive of the strong price differential for NYH material over Chicago that has been a feature of the ethanol market during the last 10 days.
No significant change in gasoline production using ethanol. Gasoline blended with ethanol fell slightly from 7,911,000 bpd to 7,983,000 bpd yielding a 84% ethanol blending penetration rate.
The large increase in ethanol production is a bearish sign for the ethanol market. ADM annouced that their expansion at Cedar Rapids, Iowa is coming on line this month, which if it produces at nameplate will add 20,000 bpd to production.
On the bullish side, the export arbitrage to Europe is still open albeit a little tougher to capture. The European market continues to move up on price for T1 product to draw more material to a net short European market. Latest T1 deal was $585/cbm FOB Rotterdam for Aguust delivery. EN spec grade material in the US is somewhere in the 25-30 cpg premium to CBOT delivered to a coastal terminal,
Prompt CBOT corn/ethanol crush margins had moved from 22 to 32 cpg over the last two weeks. The December crush margin falls to 22 cpg. This margin differential will continue to support a backwardated shaped market.
No significant change in gasoline production using ethanol. Gasoline blended with ethanol fell slightly from 7,911,000 bpd to 7,983,000 bpd yielding a 84% ethanol blending penetration rate.
The large increase in ethanol production is a bearish sign for the ethanol market. ADM annouced that their expansion at Cedar Rapids, Iowa is coming on line this month, which if it produces at nameplate will add 20,000 bpd to production.
On the bullish side, the export arbitrage to Europe is still open albeit a little tougher to capture. The European market continues to move up on price for T1 product to draw more material to a net short European market. Latest T1 deal was $585/cbm FOB Rotterdam for Aguust delivery. EN spec grade material in the US is somewhere in the 25-30 cpg premium to CBOT delivered to a coastal terminal,
Prompt CBOT corn/ethanol crush margins had moved from 22 to 32 cpg over the last two weeks. The December crush margin falls to 22 cpg. This margin differential will continue to support a backwardated shaped market.
Tuesday, August 3, 2010
Ethanol Market Volatility
So what is going in the ethanol markets? What is driving the recent surge in ethanol prices and will it continue?
1)Agriculture prices are up. The US corn crop looks like it is going to meet market expectations but the potential shortfall in the wheat harvest across Europe and Russia due to heat stress this summer is driving corn prices higher as an alternative feed grain. The extent of the impact on wheat in Europe/Russia will become clearer over the next few weeks with the harvest just getting started.
2)Brazilian ethanol producers are exhibiting much greater discipline this year by holding onto inventory and not participating in panic selling to raise cash in the early part of the sugarcane harvest. Brazilian exports of ethanol are 50% lower than same time last year. Sugar prices are also strong adding to financial strength to hold ethanol inventory
3)European prices are being pressured by wheat prices that have increased 35% in the last 45 days due to potential crop yield problems mentioned earlier. Europe also is net short ethanol and must import to meet its biofuel requirements. In the past Brazil has filled that role but with anhydrous ethanol at $600/cbm FOB Santos and European T1 prices at only $565/cbm FOB Rotterdam, Europe is turning to US material to fill the gap.
4)In the US, the EIA reported that ethanol producers had slowed down their production by approximately 5% to 816,000 bpd and traders consummated export deals that will soak up another 10,000 bpd over the next 20-30 days. This caused NYH prices to blow out and trade at 18 cpg over Chicago versus typical differentials of 10 cpg over Chicago.
5) The US market has moved into a 3-5 cpg backwardation that appears to have staying power as a market feature if producers maintain production discipline and exports continue at a 10,000 bpd pace. Record gasoline production is also helping on the domestic demand side and it remains to be seen if this level of production will continue for the summer driving season.
The Wednesday release of EIA data will be very interesting to see if these trends continue in both ethanol (down) and gasoline (up) production.
1)Agriculture prices are up. The US corn crop looks like it is going to meet market expectations but the potential shortfall in the wheat harvest across Europe and Russia due to heat stress this summer is driving corn prices higher as an alternative feed grain. The extent of the impact on wheat in Europe/Russia will become clearer over the next few weeks with the harvest just getting started.
2)Brazilian ethanol producers are exhibiting much greater discipline this year by holding onto inventory and not participating in panic selling to raise cash in the early part of the sugarcane harvest. Brazilian exports of ethanol are 50% lower than same time last year. Sugar prices are also strong adding to financial strength to hold ethanol inventory
3)European prices are being pressured by wheat prices that have increased 35% in the last 45 days due to potential crop yield problems mentioned earlier. Europe also is net short ethanol and must import to meet its biofuel requirements. In the past Brazil has filled that role but with anhydrous ethanol at $600/cbm FOB Santos and European T1 prices at only $565/cbm FOB Rotterdam, Europe is turning to US material to fill the gap.
4)In the US, the EIA reported that ethanol producers had slowed down their production by approximately 5% to 816,000 bpd and traders consummated export deals that will soak up another 10,000 bpd over the next 20-30 days. This caused NYH prices to blow out and trade at 18 cpg over Chicago versus typical differentials of 10 cpg over Chicago.
5) The US market has moved into a 3-5 cpg backwardation that appears to have staying power as a market feature if producers maintain production discipline and exports continue at a 10,000 bpd pace. Record gasoline production is also helping on the domestic demand side and it remains to be seen if this level of production will continue for the summer driving season.
The Wednesday release of EIA data will be very interesting to see if these trends continue in both ethanol (down) and gasoline (up) production.
Thursday, July 29, 2010
Brazil’s Import Barriers
Brazil made a big show of reducing their ethanol import tariff to zero earlier this year in order to spark the debate about the US ethanol import tariff that is up for renewal at the end of this year. Brazilian representatives cast themselves as supporters of free trade.
In today’s global ethanol market, Brazilian ethanol prices are very high relative to the US and Europe. Brazilian producers are holding onto inventory where in past harvest seasons they would be selling ethanol aggressively as the harvest gets into full swing. Recent consolidations in the ethanol industry, government inventory loan programs for producers and strong sugar prices all have lead to a more disciplined ethanol market in Brazil leading to the high prices.
Now that a price arbitrage is open to Brazil, US exporters are attempting to ship material to Brazil to capture these prices.
Brazil has imposed non- tariff barriers in two ways. One, the ethanol specification used for import requires that non-sugarcane produced ethanol must be 99.6% ethanol by volume while standard fuel anhydrous ethanol produced from sugarcane be 98% ethanol by volume (actual measurement is alcoholic degree of 99.3 that translates into 98% volume percent). There is no valid scientific reason to make this distinction for ethanol that is to be blended into gasoline.
Obviously, high purity(99.6%) ethanol produced in the US is a small fraction of the total ethanol produced and what is produced commands a 10-15 cpg premium over standard denatured ASTM specification ethanol.
The second non-tariff barrier has been extended bureaucratic delays in issuing import licenses. Traders trying to import ethanol into Brazil report frustrating delays in getting import licenses to take advantage of the wide open arbitrage. It is hard to determine the exact delays but with a strong price arbitrage to export to Brazil and reports of limited smaller cargos being shipped to Brazil, the bureaucratic delays are real.
In today’s global ethanol market, Brazilian ethanol prices are very high relative to the US and Europe. Brazilian producers are holding onto inventory where in past harvest seasons they would be selling ethanol aggressively as the harvest gets into full swing. Recent consolidations in the ethanol industry, government inventory loan programs for producers and strong sugar prices all have lead to a more disciplined ethanol market in Brazil leading to the high prices.
Now that a price arbitrage is open to Brazil, US exporters are attempting to ship material to Brazil to capture these prices.
Brazil has imposed non- tariff barriers in two ways. One, the ethanol specification used for import requires that non-sugarcane produced ethanol must be 99.6% ethanol by volume while standard fuel anhydrous ethanol produced from sugarcane be 98% ethanol by volume (actual measurement is alcoholic degree of 99.3 that translates into 98% volume percent). There is no valid scientific reason to make this distinction for ethanol that is to be blended into gasoline.
Obviously, high purity(99.6%) ethanol produced in the US is a small fraction of the total ethanol produced and what is produced commands a 10-15 cpg premium over standard denatured ASTM specification ethanol.
The second non-tariff barrier has been extended bureaucratic delays in issuing import licenses. Traders trying to import ethanol into Brazil report frustrating delays in getting import licenses to take advantage of the wide open arbitrage. It is hard to determine the exact delays but with a strong price arbitrage to export to Brazil and reports of limited smaller cargos being shipped to Brazil, the bureaucratic delays are real.
Monday, July 26, 2010
Ethanol 4th Quarter 2010 – Is it a Train Wreck?
By the 4th quarter of this year, the industry is scheduled to bring on another 550 mln gallons of annual capacity. This represents another 36,000 bpd of new production. By October of this year, the driving gasoline demand bump with have dissipated reducing overall gasoline demand by 250,000 bpd resulting in the loss of another 26,000 bpd of ethanol demand. This assumes that ethanol blending penetration stays in the low 80’s% through the balance of the year. We think the blending penetration staying in this range as a good assumption based on the very low price for 2010 ethanol RINs tracking in the 1.5-2.0 cpg range.
Export opportunities will be limited because of certification requirements for renewable fuels into Europe go into effect in December and it is uncertain if US producers will go to the trouble of getting their supply chain certified. Brazil may be an export outlet, but with very strict ethanol specification for imports, it is difficult to produce and move significant quantities of this type of ethanol to Brazil to relieve length in the US ethanol market.
On the positive side, if we assume $4/bushel corn and $75/barrel crude oil, there will still be a 20-40 cpg blending incentive for ethanol even without renewal of the VEETC. The EPA will issue a ruling on some type of E12 or E15 waiver by September. This will be good news psychologically for the ethanol market but the higher blends could not be realistically implemented until the middle of 2011 offering no physical relief to the market in the 4th quarter. Renewal of the VEETC prior to its expiration again is psychological but will not affect demand in the 4th quarter.
The market is paying a 6.4 cpg premium for Q1-2011 swaps over prompt pricing. The market sees the E12/E15 waiver, the higher RFS2 mandate of 12.6 bln gallons, the elimination of the small refiner exemption as all changes that will kick in for Q1. It should be noted that during the 1st quarter of any year, gasoline demand falls another 250,000 bpd below demand levels experienced in the 4th quarter due to winter weather. Even though there is good news for the 2011 market, Q1 may be too soon for this good news to physically impact the market resulting in higher ethanol prices and plant margins.
The corn crush margins for Q4-2010 and Q1-2011 are in the 24-26 cpg range which are not sustainable for the industry.
With an industry at a nameplate capacity of 14 bln gallons in the 4th quarter and demand softening or at best staying flat, ethanol plant margins are going to come under strong pressure resulting in some temporary plant slowdowns or shutdowns to balance supply and demand.
Export opportunities will be limited because of certification requirements for renewable fuels into Europe go into effect in December and it is uncertain if US producers will go to the trouble of getting their supply chain certified. Brazil may be an export outlet, but with very strict ethanol specification for imports, it is difficult to produce and move significant quantities of this type of ethanol to Brazil to relieve length in the US ethanol market.
On the positive side, if we assume $4/bushel corn and $75/barrel crude oil, there will still be a 20-40 cpg blending incentive for ethanol even without renewal of the VEETC. The EPA will issue a ruling on some type of E12 or E15 waiver by September. This will be good news psychologically for the ethanol market but the higher blends could not be realistically implemented until the middle of 2011 offering no physical relief to the market in the 4th quarter. Renewal of the VEETC prior to its expiration again is psychological but will not affect demand in the 4th quarter.
The market is paying a 6.4 cpg premium for Q1-2011 swaps over prompt pricing. The market sees the E12/E15 waiver, the higher RFS2 mandate of 12.6 bln gallons, the elimination of the small refiner exemption as all changes that will kick in for Q1. It should be noted that during the 1st quarter of any year, gasoline demand falls another 250,000 bpd below demand levels experienced in the 4th quarter due to winter weather. Even though there is good news for the 2011 market, Q1 may be too soon for this good news to physically impact the market resulting in higher ethanol prices and plant margins.
The corn crush margins for Q4-2010 and Q1-2011 are in the 24-26 cpg range which are not sustainable for the industry.
With an industry at a nameplate capacity of 14 bln gallons in the 4th quarter and demand softening or at best staying flat, ethanol plant margins are going to come under strong pressure resulting in some temporary plant slowdowns or shutdowns to balance supply and demand.
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