October 15, 2007

 

Lower ethanol demand seen adding to US corn stocks

 

 

A slowdown in corn use for ethanol production pushed US reserves of the grain higher this month, catching some market participants off guard and spurring predictions that such reserves will continue to climb in coming months.

 

The US Department of Agriculture (USDA) on Friday (October 12) estimated 2007/08 corn ending stocks at 1.997 billion bushels, well above the 1.675 billion in September, despite an increase in overall US corn production of only 10 million bushels from last month's estimate.

 

Estimated US corn production is a record 13.3 billion bushels this season as farmers planted the largest acreage since 1944. Farmers were influenced by the highest corn prices in over 10 years, spurred in part by the demand for ethanol.

 

Some of the growth in supplies was the result of a reduction in the amount of corn used by the ethanol industry, with the USDA estimating that 3.2 bullion bushels of corn would be used to make the alternative fuel. That figure was down 100 million bushels from the previous month and followed a 100 million-bushel reduction in September.

 

Even with the two reductions by USDA, ethanol demand likely is still overstated by 200 million bushels, with the ethanol industry usage closer to 3 billion bushels, said Shawn McCambridge, senior grain analyst at Prudential Financial in Chicago.

 

McCambridge expects 2007-08 corn ending supplies will reach 2.3 billion to 2.4 billion bushels because of the slowdown in ethanol and other demand factors.

 

Ethanol plant construction expanded sharply during the past year because of altered regulations. The gasoline oxygenate methyl tertiary butyl ether was banned and the Renewable Fuels Standard mandated 7.5 billions gallons of ethanol to be added to the US fuel supply by 2012.

 

The quick ethanol expansion produced a supply glut, causing the industry to slow down as the demand to blend the gasoline additive into the nation's fuel supply dwindled.

 

"The lack of new plant construction and distribution issues will likely lead to lower amounts of corn used for ethanol than current projections," said Joe Bedore, floor manager of FC Stone, who expects ethanol usage of corn to decline to 2.9 billion bushels in the 2007-08 marketing year, with corn ending stocks increasing to 2.1 billion to 2.2 billion bushels as a result.

 

The ethanol market has now matured in the past year, from a market that had a yawning gap in supply due the renewable fuels mandate to one that became overzealous in meeting that goal.

 

"The best way to describe the ethanol industry now is that it has entered into the economics of supply and demand as opposed to the economics of a mandated renewable fuels standard," said Mike Zuzolo, chief analyst at Risk Management Commodities in West Lafayette, Ind.

 

This is hard to do as oil refiners are moving toward producing heating oil and diesel, not gasoline as winter approaches, he said.

 

Despite the recent news of construction delays and plants being mothballed because of poor margins, Zuzolo expects the USDA to wait until the end of the year before adjusting its estimate of corn used for ethanol--if it does at all.

 

"I think the USDA has done its job trimming the corn used for ethanol for right now and it might not fall below the 3.2 billion currently projected," said Zuzolo.

 

According to the Renewable Fuels Association, the industry has produced 3.5 billion gallons, which with imports, meets current demand at 3.78 billion gallons, he noted.