As the US Corn Crop Withers, Ethanol Markets Soar and then Slip


"These are the times that ethanol opponents warned against. This past week has been the one where ethanol burst into the news, and where markets gyrated sharply."

dying corn

These are the times that ethanol opponents warned against.

A drought crippling the corn crop; a higher level of mandated ethanol use under the Renewable Fuel Standard (RFS); non-fuel corn consumers screaming for relief; and now, the almost certain request by some of those consumers for a lifting of at least some of the burden of RFS.

This past week has been the one where ethanol burst into the news, and where markets gyrated sharply.

One of the more interesting movements: the price of ethanol Renewable Identification Numbers (RINs), which for a calendar 2012 RIN moved up from $0.0185 (cts) per RIN at the start of the month and peaked this week at 5 cts per RIN on Wednesday. It slipped back to 4.85 cts per RIN Friday.

Platts had not assessed second calendar year ethanol RINS at more than 5 cts on consecutive days since March 2010, and not at all except for a one-day blip in October 2010. Not only that, late last year the price at times was less than 1 cent per RIN. (Even though 2012 is the current year, there is still trade in 2011 RINs for companies that seek to meet their renewable fuels mandate after the year has closed. That's why 2012 RINs are called second-year RINs).

Platts' ethanol U.S. editor Shameek Ghosh reports that the price of RINs rose primarily on the back of the rising price of ethanol relative to gasoline. But the convergence of those prices may have run its course for now.

For example, on Monday, July 16, Platts assessed Chicago ethanol at $2.655/gal, and conventional blendstock for ethanol blending—CBOB—not even4 cts higher, at $2.692/gal. A day later, ethanol was assessed approximately 2 cts more than CBOB. Earlier in the year, in late March, that spread was solidly at $1 in favor of gasoline over ethanol.

But as Shameek reports, there is no tightness in the market for ethanol. And today, the market seemed to show that. The premium of CBOB over Chicago ethanol was back out to almost 40 cts/gal, the price of RINs retreated slightly, with all of this happening even as corn was against flirting with the astronomical price of $8/bushel.

"An important threshold to consider is where the price of ethanol starts crossing the price of gasoline," said Raymond James analyst Pavel Molchanov. "At this point, ethanol is still economically acceptable compared to gasoline prices."

And Jerrod Kitt, an analyst for Linn Group, said ethanol would need to cost 20 cts or 30 cts/gallon more than gasoline to drive obligated parties—those refiners and blenders that must comply with the federal renewable fuel mandate—to blend less ethanol.

But even as the market showed some signs that ethanol's sharp rise against gasoline blendstock may have peaked—for now—the action is going to turn to Washington.

As Platts' Meghan Gordon reported Friday:

A petition to lower the amount of corn-based ethanol that must be blended into the U.S. transportation fuel supply could come as early as Monday, an ethanol industry source said Friday. Four livestock and poultry trade groups plan to make the case during a news conference Monday that the Environmental Protection Agency should shrink its ethanol mandate to prevent rising corn prices from inflicting pain on their industry and driving up food prices.

EPA spokeswoman Julia Valentine said Friday the agency has not received any petitions to waive the ethanol volumes.

Agriculture Secretary Tom Vilsack said July 18 that he does not think a Renewable Fuel Standard waiver will be needed, because plenty of ethanol remains in storage and because so much corn was planted that the crop still has the potential to rank as the third-largest in US history.

High corn prices have led ethanol producers to curb production in recent weeks. Valero, for instance, idled its plants in Albion, Nebraska, and Linden, Indiana, both of which have annual capacities of 120 million gallons.

Spokesman Bill Day would not comment on whether Valero plans to cut output further.

On Thursday, the Renewable Fuels Association gave its own take on granting an RFS waiver. The ethanol trade group, obviously, is opposed to it.

In a release, RFA said a report from Iowa State's Center for Agriculture and Rural Development, said a waiver wouldn't have much impact.

"The desire by livestock groups to see additional flexibility in ethanol mandates may not result in as large a drop in feed costs as hoped," Iowa State Professor Bruce Babcock, who wrote the study, was quoted as saying. According to RFA, Babcock's research said waiving RFS would reduce corn prices 5% at most, and cut about 5% in ethanol production.

Flexibility in meeting the RFS standard, according to the report, can be met by. . .buying RINs. Which this week, at least, went up a huge amount in percentage terms before retreating slightly. The market may think Prof. Babcock is on to something.

John Kingston

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