Ethanol Declines on Speculation Cheaper Corn to Boost Production

Ethanol declined on speculation that cheaper corn and higher production returns will prompt companies to boost output.

Futures slumped 0.5 percent as corn, the primary feedstock for the biofuel in the U.S., tumbled the most in a week on concern that rain in Argentina will ease a spell of hot, dry weather and boost global supply of the grain. One bushel of corn makes at least 2.75 gallons of ethanol.

“They’ve bought a lot of corn,” said Jerrod Kitt, an analyst at Linn Group in Chicago. “It’s going to take some time, but by the end of February we’ll probably be producing back at the highs.”

Denatured ethanol for February delivery slipped 0.9 cent to settle at $1.909 a gallon on the Chicago Board of Trade. Futures have fallen 19 percent in the past year.

Gasoline for February delivery gained 0.4 cent to $2.6264 a gallon on the New York Mercantile Exchange. The futures cover reformulated gasoline, made to be blended with ethanol before delivery to filling stations.

Ethanol’s discount to gasoline widened 1.3 cents to 71.74 cents a gallon.

The U.S. Energy Information Administration said output of the biofuel tumbled 5.6 percent to 868,000 barrels a day in the week ended Jan. 10, the lowest level since Oct. 4 and the steepest drop in records going back to June 2010. An arctic blast last week delayed trains and cut terminal operations.

Logistics Worse

“The report just confirmed what we all have been talking about for some time, and that’s the logistics issue, and that was made worse” by the weather Kitt said. “People are discounting the numbers as an anomaly.”

Corn for March delivery sank 5.75 cents, or 1.3 percent, to $4.2575 a bushel in Chicago. The corn crush spread, or the difference between the cost of the grain and the price of ethanol, was 27 cents, up from 26 cents yesterday, data compiled by Bloomberg show.

Kitt said the crush spread gives ethanol plants incentive to run at maximum capacity to capture a profit.

Ethanol stockpiles slipped 0.4 percent to 16.1 million barrels, data from the EIA, the Energy Department’s statistical arm, showed today.

In cash market trading, ethanol jumped 9.5 cents to $2.63 a gallon on the West Coast, 4 cents to $2.39 in New York, 1 cent to $2.275 on the Gulf Coast and 0.5 cent to $2.155 a gallon in Chicago, according to data compiled by Bloomberg.

The West Coast’s premium to the Gulf expanded 8.5 cents to 35.5 cents, while Chicago’s discount to New York Harbor widened 3.5 cents to 23.5 cents.

The U.S. tracks compliance with ethanol consumption mandates with Renewable Identification Numbers, certificates attached to each gallon of biofuel that can be traded among refiners.

Corn-based RINs for 2014 were unchanged at 29 cents and 2013 RINs rose 0.5 cent to 30.5 cents, data compiled by Bloomberg show.

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