For the first time since December, ethanol prices are higher than gasoline as corn surges and refiners profit from tax breaks.
The alternative fuel jumped 22 percent since the U.S. driving season began in May, rising above gas, which has fallen 6.5 percent in the same period. Ethanol as a gasoline component rose 6.1 percent since early June to 799,000 barrels a day in the week ended Aug. 27, Energy Department data show. It touched a record 810,000 barrels in the week ended Aug. 20.
“No one really felt the need to buy a lot and all of a sudden prices took off,” said Jim Damask, a manager at Biofuelsconnect, a Heathrow, Florida-based alternative energy broker. “People need to buy on the way up now.”
Ethanol may continue to rally as corn, a main feedstock for the fuel, rose to a 14-month high of $4.4675 a bushel today on speculation U.S. grain demand will increase after Russia halted exports amid its worst drought in half a century. American companies are being encouraged to blend more under a tax credit that enables them to profit as long as the additive is no more than 45 cents a gallon more expensive than the finished fuel.
Denatured ethanol for September delivery, the benchmark contract, rose to $1.944 a gallon on the Chicago Board of Trade. Futures climbed 14 percent in August. October gasoline settled at $1.8891 a gallon on the New York Mercantile Exchange, down 8 percent this year. Gasoline has averaged 23 cents a gallon more than ethanol in the past three years and the last time ethanol was higher was Dec. 15, according to data compiled by Bloomberg.
“There is more upside potential,” said Fabrizio Zichichi, an executive director at Morgan Stanley in New York. “Blending continues to increase. If you use the 45-cent tax credit, that is an incentive for people to internalize as much profit as possible.”
Slowing economic growth may damp gains, said Jeff Broin, chief executive officer of Sioux Falls, South Dakota-based Poet LLC, the largest U.S. ethanol producer.
“It’s based on gasoline demand,” Broin said. “We’ll see what happens with gasoline demand as we move forward.”
The Commerce Department cut its estimate for U.S. gross domestic product in the second quarter to an annual pace of 1.6 percent from an initially reported 2.4 percent on Aug. 27. U.S. gasoline demand slid 3.1 percent in the seven days ended Aug. 27 as motorists bought an average 9.17 million barrels of fuel a day, down from 9.46 million the prior week, MasterCard Inc. said yesterday in its SpendingPulse report.
Ban on Blends
Demand may also be stifled should the U.S. Environmental Protection Agency ban blends of as much as 15 percent of ethanol in gasoline should it determine that higher concentrations could damage engines in vehicles, lawnmowers or boats. The EPA said June 17 it may decide whether to permit so-called E-15 in vehicles made after 2007 this fall.
The U.S. House Ways and Means Committee is considering cutting the ethanol tax incentive by 20 percent while preserving a tariff that limits foreign imports. Shipments from Brazil, where ethanol is made from sugar cane, are subject to a 54-cent penalty under current rules.
Earnings at U.S. distilleries are rebounding as ethanol advances, boosting an industry battered by a glut that began two years ago. More than a dozen producers, including VeraSun Energy Corp., once the largest American distiller, filed for bankruptcy protection over an 18-month period starting in October 2008.
‘Room to Go’
The average ethanol mill in Iowa earned 18 cents a gallon on a spot basis as of Aug. 25, according to Ag Trader Talk, an online grains information service in Clive, Iowa. As recently as July, distilleries were losing money as corn rose faster than ethanol.
“We’ve got room to go, especially with the tax credit, before blending stops,” Todd Becker, chief executive officer of Green Plains Renewable Energy Inc. in Omaha, Nebraska, said in a telephone interview.
Corn for December delivery rose 7.5 cents, or 1.7 percent, to $4.4675 a bushel on the CBOT, after touching $4.4725, the highest level for a most-active contract since June 2009.
Companies are ensuring output is aligned with demand to prevent producing so much that prices fall, according to Wallace Tyner, professor of agricultural economics at Purdue University in West Lafayette, Indiana. Green Plains, the fourth-biggest U.S. ethanol producer, monitors margin opportunities in real- time, Becker said.
“We have a whole desk of traders, marketers and risk managers that move very quickly to lock margins away,” he said.
U.S. ethanol production rose to 856,000 barrels a day in the week ended Aug. 27, up 2.5 percent from the previous week, according to the Energy Department. Stockpiles declined 1.7 percent to 17.6 million barrels.
“It’s refreshing to have some margins in the industry,” Broin said. “Obviously, it’s been a difficult two years for the industry, so it’s good to see the margins returning.”