Production hits yearly low in face of Midwest drought, soaring corn prices

Source: Amanda Peterka, E&E reporter • Posted: Monday, July 9, 2012

Ethanol production reached a yearly low last week as a Midwestern drought continues to spur skyrocketing corn prices.

The U.S. Energy Information Administration reported yesterday that ethanol production for the week ending June 29 was 857,000 barrels, down 26,000 barrels per day compared with the previous week.

The percentage of ethanol used in gasoline also reached a record low for the year, at 9.52 percent. Current regulations allow up to 10 percent of the nation’s gasoline supply to be replaced by ethanol.

The decrease in ethanol production is due to a number of factors, most immediately the recent idling of two 110-million-gallon ethanol plants by Valero Energy Corp. and one 44-million-gallon plant by Nedak Ethanol LLC.

The companies are feeling the strain of decreased corn stocks and increased prices. Over the past few weeks, a severe drought in the Midwest has crippled corn production. According to the latest report from the U.S. Drought Monitor, almost all of Illinois and Indiana, as well as parts of Iowa and Minnesota, is in drought conditions.

In response, corn prices have risen above $7 a bushel, according to CME Group.

“Ethanol prices have not kept up with the price of corn,” Valero spokesman Bill Day said. “The corn plus the operating expense of the ethanol plant is more than the plant is receiving for ethanol.”

Valero has kept plant employees on the payroll and expects to restart operations before the fall harvest, Day said.

Geoff Cooper, vice president of research and analysis at the Renewable Fuels Association, also blamed the low production levels on a decreased demand for gasoline during the first half of the year, which has spurred a complementary decrease in the demand for ethanol.

That, coupled with high levels of ethanol stocks, has left the industry with an imbalance in supply and demand, Cooper said.

But “we’re beginning to see signs of improvement in that supply-demand balance,” he said. “We’re expecting things to hopefully improve in the second half of the year.”

EIA said stocks for the week ending June 29 were at their lowest levels since mid-January, and the demand for gasoline rose to its second-highest recorded level of the year, averaging 378 million gallons a day. Ethanol prices, the agency said, are also starting to pick up.