Ethanol Strengthens Relative to Gasoline as Corn Advances

Source: By Mario Parker, Bloomberg • Posted: Thursday, December 6, 2012

Ethanol strengthened relative to gasoline as corn gained on speculation that bad weather in South America will reduce crops.

The grain-based additive’s discount to gasoline was 21.08 cents a gallon based on front-month futures, versus 26.5 cents yesterday. The spread has averaged 62.35 cents this year.

Corn, the primary feedstock in manufacturing ethanol in the U.S., climbed on concern that too much rain in Argentina will cut yield prospects, boosting demand for U.S. supply. Prices for the grain have gained 17 percent this year, squeezing profits at ethanol distilleries and prompting the industry to limit output.

“It’s break-even for the efficient guy,” said Wallace Tyner, an agricultural economist at Purdue University in West Lafayette, Indiana. “It’s break-even for some and for some that’s losing money.”

Denatured ethanol for December delivery advanced 0.3 cent to $2.427 a gallon on the Chicago Board of Trade. The contract expired today. Futures have gained 10 percent this year. The more actively traded January contract rose 0.1 cent to $2.421.

In cash market trading, ethanol in the U.S. Gulf gained 3 cents, or 1.2 percent, to $2.495 a gallon and in Chicago the additive climbed 2 cents, or 0.8 percent, to $2.44, data compiled by Bloomberg shows.

Spot Prices

Ethanol on the West Coast added 0.5 cent to $2.575 a gallon and in New York the biofuel was unchanged at $2.53.

Gasoline for January delivery slid 5.12 cents, or 1.9 percent, to settle at $2.6378. The contract covers reformulated gasoline, made to be blended with ethanol before delivery to filling stations.

Corn for March delivery added 5.75 cents, or 0.8 percent, to $7.5775 a bushel in Chicago. One bushel makes at least 2.75 gallons of ethanol.

Based on December contracts for corn and ethanol, producers are losing 31 cents on each gallon of the fuel made, up from 29 cents yesterday, excluding the revenue that can be pocketed from the sale of dried distillers’ grains, a byproduct of ethanol production that can be fed to livestock, according to data collected by Bloomberg.

Tyner said the industry is producing too much of the biofuel to raise prices enough to capture a profit.

Output rose 4 percent to 835,000 barrels a day in the week ended Nov. 30 from the previous week, the highest level since June 29 while down 10 percent from a year earlier, Energy Department data show.

Stockpiles at 19.3 million barrels are at the highest level since July 27 and 7.8 percent above the year-earlier level, the agency said today.

Ethanol-blended gasoline made up 87 percent of total U.S. gasoline pool in the week ended Nov. 30, according to department data, the lowest since Jan. 13.