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Ethanol’s Discount to Gasoline Swells on Lower Production Costs

Sept. 4 (Bloomberg) -- Ethanol’s discount to gasoline swelled on speculation the corn harvest will lower costs to make the biofuel and boost supply.

The spread, or price difference, expanded 5.77 cents to 97.93 cents a gallon as corn prices declined and as the corn crush spread, or the difference between the cost of the grain and a gallon of ethanol, reached the highest level this year, data compiled by Bloomberg show.

“That October ethanol contract is just getting hammered,” said Will Babler, a broker at Atten Babler Risk Management LLC in Galena, Illinois. “Today is brutal. The risk-premium is blowing out of the market. We’re seeing a good Southern harvest.”

Denatured ethanol for October delivery fell 5.8 cents, or 3 percent, to $1.885 a gallon on the Chicago Board of Trade. The September contract, which expires tomorrow, added 0.3 cent to $2.483.

Gasoline for October delivery decreased 0.03 cent to $2.8643 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 is made from corn in the U.S. Production of the grain will raise to 13.676 billion bushels this year from 10.78 billion last year, Allendale Inc., a McHenry, Illinois-based research company and broker said today in a statement, citing a survey of farmers from Aug. 19 through Aug. 30.

Corn Sinks

Corn for December delivery slumped 5.75 cents, or 1.2 percent, to $4.695 a bushel in Chicago. September corn sank 4 cents to $4.94.

The corn crush spread, based on September contracts, was 68.66 cents, up from 66.91 cents yesterday, data compiled by Bloomberg show. The spread for December is minus 4 cents, and every month through July 2016 also shows a loss from making the biofuel.

Refiners are required to use 13.8 billion gallons of ethanol this year. Each batch of ethanol is attached a Renewable Identification Number, or RIN, to help the government track compliance and that can be traded among companies.

Corn-based ethanol RINs were unchanged at 71 cents, data compiled by Bloomberg show. Advanced RINs, which cover biodiesel and Brazilian sugarcane-based ethanol, fell 1 cent to 75 cents.

Ethanol production in the week ended Aug. 23, fell 2.8 percent to 820,000 barrels, the lowest level since March 29 and 6.5 percent higher than the record-low in January, according to data from the Energy Information Administration.

Ethanol Supplies

Stockpiles of the biofuel decreased 1.4 percent to 16.3 million barrels, the lowest since July 5, and 5.2 percent higher than the all-time low in June, data from the Energy Department’s statistical arm show.

Imports have averaged 22,000 barrels a day this year through Aug. 23, about 38 percent higher than the same period in 2012, according to EIA data.

In cash market trading, ethanol on the West Coast slumped 7 cents to $2.71 a gallon; in New York prices decreased 5.5 cents to $2.695; in the U.S. Gulf the additive declined 5 cents to $2.74; and in Chicago the biofuel gained 0.5 cent to $2.70 a gallon, data compiled by Bloomberg show.

The Gulf’s premium to the West Coast expanded 2 cents to 3 cents, the highest since Dec. 30, 2011, while New York traded at a 0.5 cent discount to Chicago.

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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