Ethanol Pares Largest Quarterly Gain Since 2010 on Cuts

Source: By Lucia Kassai, Bloomberg • Posted: Tuesday, March 18, 2014

Ethanol futures pared the largest quarterly gain since 2010 as distillers slowed production because of difficulty moving the biofuel to markets.

Ethanol has risen 28 percent in the first quarter, ranking behind only coffee and lean hogs among commodities, as the frigid winter and competition for rail space made it harder to move the fuel, prompting some plants to curtail output. Last week’s 7 percent advance was the sixth in a row.

“There’s certainly a pullback in production due to railroad problems,” said Chris Wilson, an analyst at Atten Babler Risk Management LLC in Galena, Illinois. “Margins are exceptionally high, but distillers can’t get the ethanol to markets.”

Denatured ethanol for April delivery slipped 2.4 cents, or 1 percent, to settle at $2.443 a gallon on the Chicago Board of Trade. The drop was the first in five days.

Rising ethanol has widened the premium to corn and narrowed the fuel’s discount to gasoline. The crush margin, or the cost difference between ethanol and the corn to make it, jumped to 57 cents a gallon today from about 20 cents at the end of 2013. Ethanol’s discount to gasoline, which ended last year at 87.48 cents a gallon, was at 43.81 cents a gallon today.

At least 10 plants shut production for two days this month because of a shortage of rail cars, Jason Ward, director of grains and energy at Northstar Commodity Investments LLC in Minneapolis, said last week.

Declining Output

Ethanol production in the U.S. fell to 869,000 barrels a day in the week ended March 7, the lowest level since Jan. 10, the Energy Information Administration said. Inventories of 15.9 million barrels are down 15 percent from a year earlier.

Gasoline for April delivery fell 2.7 percent to $2.8811 a gallon on the New York Mercantile Exchange. The futures cover reformulated gasoline, made to be blended with ethanol before delivery to filling stations.

In cash market trading, ethanol was unchanged in New York at $3.60 a gallon, at $2.525 in Chicago and at $3.20 on the Gulf Coast. The biofuel gained 5 cents to $3.45 a gallon on the U.S. West Coast.

Margins are rich after corn prices dropped 40 percent last year, and as Brazil, the world’s second-largest producer after the U.S., has been buying ethanol from the U.S. to meet domestic demand.

Brazil more than doubled imports to 9.88 million gallons in January, all of it from the U.S., data from Sao Paulo-based sugarcane industry Unica shows.

Growing Exports

“Exports have been soaking up the excess production in the U.S.,” Wilson said. “Brazil is importing, which generates demand for U.S. ethanol and at the same time reduces competition.”

Corn for May delivery gained 1.4 percent to close at $4.79 a bushel in Chicago.

Omaha-based Green Plains Renewable Energy Inc. (GPRE) resumed production at its Fergus Falls, Minnesota, plant yesterday after a fire in the plant’s dryer system on March 10, Jim Stark, a spokesman, said in an e-mailed response to questions.

The plant has the capacity to produce about 60 million gallons of ethanol a year, according to the company’s website.