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Ethanol Plunges Against Gasoline on Signs of Higher Production

March 28 (Bloomberg) -- Ethanol’s discount to gasoline widened to the most in three weeks on speculation lower feedstock costs will spur idled plants to resume production.

The spread, or price difference, swelled 12.19 cents to 65.44 cents a gallon after the Agriculture Department reported that farmers intend to plant 97.3 million acres of corn this year, up from 97.2 million in 2012 and the most since 1936. One bushel of the grain makes at least 2.75 gallons of ethanol.

“It will make their feedstock costs lower when they buy their corn,” said Jim Damask, a manager at StarFuels Inc. in Jupiter, Florida. “This will help. You would think it would help.”

Denatured ethanol for April delivery dropped 13.2 cents, or 5.1 percent, to $2.451 a gallon on the Chicago Board of Trade, the biggest decline since Dec. 6, 2011, and the lowest price since March 7. Futures have risen 12 percent this year, the best performance for the January-March quarter since the end of 2010, when prices jumped 19 percent. The biofuel gained 1.9 percent this month.

Gasoline futures for April delivery fell 1.01 cents, or 0.3 percent, to $3.1054 a gallon on the New York Mercantile Exchange. The contract covers reformulated gasoline, made to be blended with ethanol before delivery to filling stations.

Ethanol production has been battered by higher output costs because of drought in the Midwest that baked corn crops and sent prices for the grain to a record in August.

Corn Drops

Corn for May delivery slumped the exchange limit of 40 cents, or 5.4 percent, to $6.9525 a bushel in Chicago. One bushel makes at least 2.75 gallons of ethanol.

The corn crush spread, representing gains or losses from turning corn into ethanol and based on May contracts, was minus 9 cents a gallon, compared with minus 10 yesterday. The spread was more than twice that at the beginning of the year.

The amount doesn’t include revenue from the sale of dried distillers’ grains, a byproduct of ethanol production, which can be fed to livestock.

Damask said lower costs would encourage distillers to increase operations. Producers stand to benefit as long as ethanol doesn’t fall as much or more than corn, he said.

Output of the biofuel last week fell 0.5 percent to 805,000 barrels a day, according to data from the Energy Information Administration. That’s down 16 percent from a record 963,000 barrels a day in December 2011 and the lowest level for this time of year in records going back to June 2010.

Production Resumes

Valero Energy Corp., the third-biggest U.S. ethanol producer, said March 22 that it resumed output at a distillery in Linden, Indiana, because of better returns to make the biofuel.

Before today’s USDA report, ethanol traded as high as $2.579 a gallon on the EIA data, which showed stockpiles have fallen a record eight consecutive weeks to 17.4 million barrels, the lowest level since December 2011.

Ethanol-blended gasoline made up 95 percent of the total U.S. gasoline pool, little changed from last week’s all-time high in records going back to May 2004.

Imports were unchanged at 27,000 barrels a day, down 78 percent from the record of 122,000 barrels in October, said the EIA, the statistics arm of the Energy Department.

Brazil, where the biofuel is made from sugarcane, is the largest supplier of ethanol to the U.S.

Spot ethanol in Sao Paulo cost $2.28 a gallon last week, 7 percent below today’s futures price, data compiled by Bloomberg show.

Spot Trading

In cash market trading, ethanol plunged 10.5 cents to $2.47 a gallon in Chicago, 9 cents to $2.57 in New York, 10 cents to $2.52 in the Gulf Coast and 10 cents to $2.685 a gallon on the West Coast, data compiled by Bloomberg show.

New York Harbor’s premium to Chicago expanded to 10 cents while the Gulf Coast’s discount to the West Coast was unchanged at 16.5 cents.

The value of Renewable Identification Numbers, or RINs, for corn-based ethanol fell 0.5 cent to 69 cents, data compiled by Bloomberg show. Advanced RINs, which include biodiesel and Brazilian sugarcane-based ethanol, slid 2 cents, or 2.7 percent, to 72 cents, the lowest price since March 1.

RINs are certificates assigned to each gallon of biofuel produced. Once refiners blend the biofuel into petroleum, they can keep the credit to show compliance with federal mandates or trade it to another party.

Certificates for both grades of RINs rose to records on March 8 and oil interests and ethanol supporters have argued about its effect on retail gasoline prices.

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

To contact the editor responsible for this story: Bill Banker at bbanker@bloomberg.net

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