Ethanol Discount to Gasoline Narrows on Possible Plant Closings

Ethanol’s discount to gasoline narrowed for a second day on concern that tight corn supply before September’s harvest will force producers to cut output.

The spread, or price difference, contracted 0.85 cent to 67.76 cents a gallon after the Agriculture Department estimated corn stockpiles will be 26 percent lower than a year earlier. Ethanol production is below average for this time of year, according to data compiled by Bloomberg.

“It could just be an issue of making it through the end of the crop cycle,” said Will Babler, a broker at Atten Babler Risk Management LLC in Galena, Illinois. “A lot of plants are going to have to shut down. We’ll have to see how that plays out.”

Denatured ethanol for September delivery slipped 0.5 cent to $2.18 a gallon on the Chicago Board of Trade. Futures have fallen 0.5 percent this year.

Gasoline for September delivery fell 1.35 cents, or 0.5 percent, to $2.8576 a gallon on the New York Mercantile Exchange. The contract covers reformulated gasoline, made to be blended with ethanol before delivery to filling stations.

Last year’s corn crop was devastated by the worst drought since the 1930s, which forced ethanol plants to shutter operations temporarily. Farmers responded by planting the most acres of the grain since 1936.

Corn Gains

Corn for September delivery rose 5.25 cents, or 1.1 percent, to $4.735 a bushel in Chicago. The more-actively traded December contract gained 1.5 cent to $4.5975. One bushel of the grain makes at least 2.75 gallons of renewable fuel.

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 46 cents, down from 48 cents yesterday, data compiled by Bloomberg show.

Babler said most traders are watching the volatility in the market for Renewable Identification Numbers, or RINs, the certificates that the U.S. and refiners rely on to track compliance with government mandates for use of the biofuel.

The Environmental Protection Agency said Aug. 6 that it would extend the compliance period for this year by four months and signaled that it may adjust the 2014 targets.

Corn-based ethanol RINs fell 7 cents to 67 cents, the lowest level since April 25, while advanced RINs, which cover biodiesel and Brazilian sugarcane-based ethanol, slipped 9 cents to 74 cents, the cheapest since March 28.

Spot Trading

In cash market trading, ethanol rose 10 cents to $2.48 a gallon on the West Coast, 4.5 cents to $2.395 on the Gulf Coast and 2.5 cents to $2.295 in Chicago, data compiled by Bloomberg show. In New York, the biofuel lost 1.5 cents to $2.45 a gallon.

West Coast ethanol’s premium to the U.S. Gulf expanded 5.5 cents to 8.5 cents, while Chicago’s discount to New York Harbor narrowed 4 cents to 15.5 cents.

Ethanol production last week gained 2.5 percent to 853,000 barrels a day, an Energy Information Administration report showed yesterday. That’s down 11 percent from the record 963,000 barrels a day in December 2011.

Stockpiles increased 1.6 percent to 16.7 million barrels, down 10 percent from a year earlier, the EIA, the Energy Department’s statistical arm, said.

Ethanol imports have averaged 22,000 barrels a day through Aug. 2, up from 12,000 during the same period in 2012.

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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