U.S. ethanol producers seek pricing reform as markets plunge, ADM sells

Source: By Jarrett Renshaw and Michael Hirtzer, Reuters • Posted: Tuesday, December 18, 2018

NEW YORK/CHICAGO (Reuters) – U.S. ethanol producers stung by collapsing prices are seeking changes to the way benchmark values for the biofuel are established, arguing the current system used by exchanges is vulnerable to manipulation, according to sources.

The push comes as the key farm belt industry struggles with weak demand growth, a loss of export markets due to the U.S. trade war with China, and aggressive selling by global commodities giant Archer Daniels Midland Co (ADM.N) that have pushed ethanol prices to 13-year lows.

ADM is better placed to survive a long stretch of low prices than its ethanol-focused U.S. rivals, many of whom are concerned the company is deliberately pressuring the biofuel market lower to drive them out of business and are keen for a stable hedging tool to defend against further dips.

Top U.S. ethanol producer POET LLC has asked the CME Group (CME.O) to change its pricing method for a key swap contract used by the industry to hedge, and the rival ICE exchange is contemplating offering an alternative to CME’s product after discussions with biofuels companies, according to three sources familiar with the moves who asked not to be named because they are not authorized to speak publicly.

CME’s Chicago ethanol swap contract CUUc1 is the most widely used derivative instrument the industry uses to protect itself against market fluctuations. But traders have recently been reluctant to use the contract for fear it will expose them to further losses due to the strong selling by ADM.

CME currently calculates the swap contract’s value by averaging the monthly daily settlement price in the physical market as provided by commodities pricing company Platts. Several ethanol producers want that method changed.

Critics say the Platts price can be easily manipulated because it is based on deals that occur only during a 30 minute window each day, as opposed to during the whole day. In November, ADM represented more than 90 percent of sales in the Chicago Platts window, two traders said.

ADM declined to comment for the story and has never publicly defended itself against criticism about its activity in the trading window. ADM CEO Juan Ricardo Luciano blamed overproduction and the loss of sales to China for the industry’s recent woes in the latest earnings call.

Platts did not immediately respond to requests for comment for this story.

The issue has become more urgent as slumping prices force ADM rivals like Green Plains, POET and Valero to shut, idle, or sell off plants. U.S. ethanol prices have dropped below $1.20 a gallon 1ZEc1, the lowest in about 13 years, with inventories swelling to records.

POET, the nation’s leading ethanol producer at two billion gallons a year, last month filed a complaint about the issue with CME, which sets the rules for the ethanol swap contract, the company confirmed to Reuters.

“POET submitted a complaint to CME outlining our concerns regarding the Chicago Ethanol Swap contract. Our concerns are with the market-influencing impacts of this specific contract,” POET spokesman Matt Merritt said in an email.

He declined to provide other details.

Two sources who read the letter said the complaint argues the swap contract is based on a flawed pricing method that a single company can manipulate. The letter does not identify ADM, the sources said.

CME spokesman Chris Grams declined comment.

A rival derivatives exchange, Intercontinental Exchange Inc (ICE.N), is considering offering an alternative to CME’s contract that would incorporate some of the changes sought by ethanol traders, such as using a full-day average physical price to determine the settlement price, the two sources, along with an additional source familiar with the effort, told Reuters.

ICE is planning to study the idea until at least the end of the year before making any decision, the sources said.

ICE said, “We are constantly evaluating opportunities that could meet customer demand and complement our global energy suite.”

Separately, terminal operator Zenith Energy Management is talking to traders about the possibility of a new ethanol storage hub in Joliet, Illinois, to rival Kinder Morgan Inc’s (KMI.N) Argo terminal near Chicago – the main delivery point for Chicago ethanol, the two sources familiar with the efforts said.

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The terminal, about 30 miles south of Argo, would allow shippers to bypass congested rail lines in Chicago and provide a new outlet to other trading hubs where prices are higher.

A spokesperson for Zenith did not respond to a request for comment.

It is unclear to what extent other ethanol producers have joined the efforts to make changes to pricing.

Ethanol maker Green Plains Inc (GPRE.O) told investors in a recent earnings call that it was working with other companies to seek alternatives to the current pricing methodology, without elaborating.

Reporting by Jarrett Renshaw in New York and Michael Hirtzer in Chicago; editing by Richard Valdmanis and Phil Berlowitz