Ethanol Strengthens Against Gasoline on Higher Production Costs

Ethanol strengthened against gasoline on concern that higher pre-harvest corn prices are boosting production costs for producers of the biofuel.

The spread, or price difference, narrowed 2.15 cents to 55.24 cents a gallon as corn for July delivery rose to the highest level since February. The grain is the primary ingredient used to make ethanol in the U.S., with one bushel making at least 2.75 gallons of the fuel.

“The strength in corn is putting pressure on ethanol production margins and keeps ethanol prices rich,” said Joshua Bailer, managing director of Next Generation Commodities, the biofuels division of Atlas Commodities LLC in Miami.

Denatured ethanol for August delivery climbed 2.8 cents, or 1.2 percent, to $2.469 a gallon on the Chicago Board of Trade. Prices have gained 13 percent this year.

Gasoline for August delivery added 0.65 cent to $3.0214 a gallon on the New York Mercantile Exchange. The contract covers reformulated gasoline, made to be blended with ethanol before delivery to filling stations.

Corn inventories before the start of this year’s harvest will decline to 729 million bushels, down from 769 million forecast a month ago and 989 million last year, the U.S. Agriculture Department estimated today. Last summer’s U.S. drought, the worst since the 1930’s Dust Bowl, wilted crops and wiped out returns to make ethanol from the grain.

Corn Prices

Corn for July delivery increased 7 cents, or 1 percent, to $7.1675 a bushel in Chicago, the highest price for the contract since Feb. 5.

The corn crush spread, or the cost difference between a gallon of ethanol and the corn needed to make it, based on September contracts for the grain and biofuel, was 28 cents, down from 29 cents yesterday, data compiled by Bloomberg show.

Ethanol production last week rose 2.1 percent to 881,000 barrels a day, a U.S. Energy Information Administration report showed yesterday. That’s 8.5 percent below the record 963,000 barrels a day in December 2011.

Stockpiles of the fuel swelled 1.8 percent to 15.7 million barrels, rebounding from the lowest level in records going back three years, the report from the Energy Department’s research arm showed.

Renewable Identification Numbers, or RINs, for corn-based ethanol in the U.S. slipped 2 cents to $1.13 from the previous day’s record high, data compiled by Bloomberg show. Advanced RINs, which cover biodiesel and Brazilian sugarcane-based ethanol, also dropped from a record, falling 2 cents to $1.16.

The RINs are used to track adherence to a federal law requiring the use of 13.8 billion gallons of ethanol this year.

Bailer said increasing imports would have “only so much effect” on supply. The U.S. imported 25,000 barrels of the fuel last week, compared to none a week earlier, the EIA said.

Anhydrous ethanol in Sao Paulo cost $2.22 a gallon as of July 5, the lowest price since Nov. 9, data compiled by Bloomberg show.

Ethanol-blended gasoline made up about 91 percent of the total U.S. gasoline pool last week, down from 94 percent the previous week, according to EIA.

To contact the reporter on this story: Mario Parker in Chicago at mparker22@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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