October 11, 2010

US ethanol shoots up on surprise corn shortfall

US ethanol prices shot higher Friday (Oct 8) after a government report forecast a surprising shortfall in corn yields, sending grain prices surging.

The USDA forecast a surprisingly small 12.664 billion-bushel US corn crop this year – 4% smaller than the record forecast a month ago – and the tightest corn supply in 15 years.

Ethanol futures <ZEc1> closed up 9.9% at US$2.185 per gallon as traders bet the higher corn price could cut into ethanol output.

The current weak market for gasoline and high price for ethanol could further squeeze producers as it gives blenders no incentive to maximise ethanol use.

Most US ethanol producers distill the alternative fuel from corn. Corn futures jumped to US$5.2825 per bushel, the largest front month gain since June 30.

"This is the kind of number we have been scared of," said one Midwestern oil trader.

The ethanol industry has been urging the government to permit sale of a gasoline blend containing 15% ethanol for some vehicles up from 10% today.

The ethanol industry argues the blend called E15 is the only way to ensure refiners and gas stations comply with a government mandate, put in place before the recession, requiring 15 billion gallons of ethanol to be mixed into gasoline per year by 2015. This year's mandate is 12 billion gallons.

The US Environmental Protection Agency is due to rule by October 15 whether to allow the sale of E15 for vehicles built in 2007 or later.

Oil refiners have resisted the ethanol mandate as the biofuel has hurt gasoline sales amid weak demand in the US. Some retailers are also reluctant to embrace the new fuel since they say their liabilities may not be clear.

Cash ethanol trading was quiet despite sharply higher bids. Some trading was reported in credits for blending ethanol known as RINS.

"All I am seeing is bids," said a Midwestern ethanol cash trader.

Traders said lack of offers made it difficult to gauge the price accurately.

"I wish I saw some real numbers at this point. Because of bullish corn report, the market anticipates stronger ethanol prices, which could translate into less blending and more need for RINS," said one trader, who said there was just a single RINS trade so far.

Prices of RINS doubled to US$0.05 per gallon from the US$0.025 per gallon seen on Thursday (Oct 7), a surprising move in a normally staid market, traders said.