Higher Ethanol Production
Dec 11, 2013
Corn, beans, and wheat closed higher on Wednesday while trading on light volume. The rally was attributed to ethanol production, seasonal trends, and futures liquidation prior to the holidays and the end of the quarter/year. March corn was 3 ¼ cents higher at $4.39 ¼, Jan beans 5 ¾ cents higher at $13.44, and March wheat 2 cents higher at $6.40 ¾.
The weekly EIA ethanol data was released this morning and production was up 31,000 from last week while stocks were up 0.3 million barrels. This is the 3rd highest production week on record and has prompted many to view this as bullish for corn. It’s true that ethanol profitability is extremely high for Iowa prices. Discretionary blending should be a decently large percent of total production especially after the EPA’s proposal for a reduction of the mandate. All demand factors point towards a strong year for ethanol production which should be friendly for corn right?
Unfortunately we are not looking at the favorable ethanol numbers as bullish for a couple of reasons. Ultimately there is only so much ethanol we can use in this country due to the blending wall and the poor infrastructure of e85. We put the blending wall somewhere between 13.0 and 13.4 billion gallons depending on 2014 gasoline demand. Many estimates are calling for a decline in total fuel usage in 2014. Assuming we max out our demand at 13.4 billon in ethanol and convert bushels to gallons at a ratio of 2.82 – 1, total corn used would be 4.751 billion bushels, well below the 4.950 the USDA is currently projecting. So the remaining demand to bring us up to USDA estimates would have to come from exports and/or a rebuild of ethanol stocks back to early 2012 levels. The point is even if we gave the very best outcome possible for ethanol usage driving corn demand, we can only see potentially another 150 million more bushels used than what the USDA is currently projecting. This of course is not mentioning the fact that the USDA has been using an outdated conversion factor for production which we believe accounts for many of the 100-200 million bushel swings in demand that always get attributed to demand drops in the "feed and residual" category, never ethanol. An extra 150 million bushels of demand still leaves final corn carryout well above 1.5 billion still, but we still think it will be closer to 2 billion when the dust settles. This opinion is derived from the strong production and poor livestock feed demand after three years of high feed costs. We maintain that corn will have a hard time sustaining rallies from here until the next weather event.
The WASDE report wasn’t very significant for market direction. The January reports should be a much bigger price driver.
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