Ethanol production in US approaches milestone at warp speed

Source: By Jordan Godwin, The Barrel Blog, Platts • Posted: Monday, December 8, 2014

Earlier this year, I jokingly asked an ethanol trader if he thought the US would hit one million barrels of ethanol production per day anytime soon.

“No way,” he said. “That’s light-years away.”

And in many ways, it did seem like an impossibility at the time.

Painfully expensive feedstock corn prices brought on by the drought put producers through a lot of rough patches in 2012 and 2013. Many plants were squeaking by with minimal profit margins, some operated in the black and a handful shuttered operations altogether.

But to say 2014 has rejuvenated the ethanol industry would be an understatement.

By the Platts model, margins have nearly doubled from 2013, averaging roughly 95 cents/gal on the year through November for a typical Midwest dry-mill plant with an annual capacity of 50,000 gal/yr. Extremely cheap corn prices coupled with handsome returns in the spot market to line producers’ pockets, and more and more companies are jumping back on the ethanol bandwagon.

Just this week, Noble Americas showed signs that they would restart operations at a South Bend, Indiana, plant that shut down in 2012 when its previous owner went bankrupt. At least a half-dozen other plants have been restarted this year after a minimum one year of dormancy.

Considering the US Energy Information Administration said US ethanol production for the week ended November 21 hit an all-time high of 982,000 b/d, suddenly, a million barrels per day doesn’t seem “light-years away.”

If ethanol prices hold steady for the remainder of the year and plants keep running near capacity to maximize returns, don’t be surprised to see it happen before the end of the year.

The funny thing is, the rising ethanol production has run parallel with stronger gasoline demand, but because gasoline has been relatively cheap to ethanol, the blending rate has been on a steady decline.

In November, the four-week rolling average of gasoline demand rose for three straight weeks to a three-year high of 9.22 million b/d. Meanwhile, the four-week rolling average of the ethanol blending rate fell for three straight weeks to a six-month low of 861,000 b/d.

This is particularly interesting because it has pushed the four-week rolling average of the ethanol blending rate — calculated by dividing the four-week rolling averages of the net ethanol input and gasoline demand — all the way down to 9.34%, far, far away from the dreaded 10% blend wall.

Essentially, unless arbitrage opportunities open up for export options in the coming weeks, we’re producing ethanol with nowhere to go. If that happens, spot prices would expectedly fall and margins would suffer.

If it doesn’t, however, get ready for a significant milestone for the US ethanol industry.