Ethanol producers reduced production to the lowest level in almost two years as a drought increased corn costs and inventories remained ample.
Output fell 4.2 percent last week to 821,000 barrels a day, the Energy Department reported, and the Agriculture Department decreased its harvest forecast. Corn for December delivery has risen more than 30 percent in a month as the worst Midwest drought since 1988 has taken hold. Inventories were 19.5 million barrels, near the one-year average.
“Ethanol margins are under severe pressure with the corn crop under stress and significant ethanol inventories available,” said Mike Breitenbach, an analyst and trader at Blue Ocean Brokerage LLC in New York.
Denatured ethanol for August delivery fell 0.3 cent to $2.465 a gallon at 12:09 p.m. on the Chicago Board of Trade. Futures have gained 12 percent this year.
Farmers will harvest 12.97 billion bushels this year, down 12 percent from a June prediction of 14.79 billion, the Agriculture Department predicted. About 4.9 billion bushels will go to make ethanol, down from 5 billion estimated in June and 5.02 billion used in 2011.
Companies are losing 18 cents on each gallon of ethanol made, assuming one bushel of corn makes at least 2.75 gallons of the biofuel, according to data compiled by Bloomberg.
“If margins persist at this level, ethanol plants will be under severe economic pressure to cut production,” Breitenbach said.
Based on USDA forecasts, production in 2013 would be 13.4 billion gallons, less than the 13.8 billion required by federal law mandating ethanol use. The U.S. Environmental Protection Agency manages the program.
“We’re going to have a tough time meeting the mandate,” said Terry Reilly, an analyst at Citigroup Global Markets Inc. in Chicago. “Eventually EPA will have to change the mandate.”
Valero Energy Corp. (VLO), the third-biggest U.S. ethanol producer, last month shut output at its plants in Linden, Indiana, and Albion, Nebraska, citing “economic reasons.”
Nedak Ethanol LLC said June 15 that it temporarily suspended production at its Atkinson, Nebraska, mill because of poor margins.
Green Plains Renewable Energy Inc. (GPRE), the fourth-biggest U.S. ethanol producer, slowed output at two of its “smaller plants” by 30 percent in February, Jim Stark, a company spokesman said in an e-mail.
“The fact that Valero shut capacity is interesting because they have a balance sheet and good assets,” said Ian Horowitz, an analyst at Topeka Capital Markets Inc. in New York. “You’ll either see more capacity shutdown of slowdown.”
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